SUMMARY: A recently issued independent actuarial study shows that the Mutual Mortgage Insurance Fund (MMIF) capital ratio has fallen below its statutorily mandated threshold.
We can pretend that that the FHA does not need a bailout, but it does. Unlike its bad siblings, Fan and Fred, there has never been a question whether Uncle Sam is on the hook with FHA. We don’t need a fancy conservatorship this time. Tim Geithner over at Treasury will just write the checks to cover the shortfalls. The good news is that those debts will not show up on the Federal balance sheet. They don’t count because there are “assets” behind these loans.
The Notice would appear to be a requirement of some sort to solicit public opinions on policy changes at FHA. The proposed changes would (supposedly) address the high default rates that the FHA is experiencing. What have they proposed to achieve this? Surprise surprise, they are going to instill some sanity into their lending program.
This kills me. I, and a hundred others, have been writing and screaming that FHA was just a ‘bailout to be’ for a few years now. This was an easy call. FHA was making 96 ½% LTV loans to borrowers with low FICO scores. They did this in a period where RE values fell by 25%. Their business plan was, “How To Take a Bath on the Tax-payer Dime”.
Don’t look for these changes to come anytime soon. I suspect that this will not evolve to a point where actual adjustments are made until after the next election. But these changes are coming. Real equity of 10% will be required for borrowers with low credit scores. There will be restrictions on seller equity, or “concessions”.
My read on the proposals is that the FHA is getting out of what I call “Silly Lending”. If they actually do take these steps it will mitigate future losses. It will also sharply restrict the availability of mortgage credit. Similar steps are being taken by F/F. The implementation will be felt this fall. By spring time mortgage land could look quite different. The D.C. lenders are 95% of the mortgage market today. There are no willing private sector lenders. If Washington steps back RE will get illiquid.
Central to our problems is the fact that for many years a social agenda and lending standards were mixed. The goal was admirable. Make mortgage credit available to all so that everyone could enjoy a leveraged bet on home appreciation. What a terrible bet the feds have financed. There are very few winners in this story. I read the following as a mea culpa. I think FHA accepts that bad lending standards have ended up hurting those they intended to aid. And along the way it hurt all of America’s homeowners.
Given FHA’s mission, allowing the continuation of practices that result in such a high proportion of families losing their homes represents a disservice to American families and communities. It is FHA’s intent to eliminate this portion of its business, and utilize other established methods to reach and support these families.
In the end the mortgage mess will cost us nearly a trillion. A very big price. For that tab we should learn a lesson. Soft lending to achieve broad social goals is a mistake. Tell that to Barney Frank. This was his dream.
"If Washington steps back RE will get illiquid."
ReplyDelete"The good news is that those debts will not show up on the Federal Balance Sheet."
Wow, you really know how to scare the heck out of a guy first thing in the morning, BK!
You're a little late to the party on this one. HUD announced eight months ago -- on Nov. 12, 2008 -- that the MMIF capital reserve ratio had fallen below the statutory minimum, and the story was widely covered in the news media.
ReplyDeletehttp://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2009/HUDNo.09-214
BTW, the 2 percent capital reserve ratio is intended to give FHA a big enough cushion to cover all claims even if they stopped writing new policies today, which they have not.
The actuarial study showed that even in the event of a double dip recession, premiums from new loans would cover claims going forward and there would be no need for a bailout.
FHA has already tightened up underwriting -- the changes detailed in this Federal Register notice are just the latest batch -- and the loans it's made in recent years are performing better than those made during the boom. Loans with seller-funded downpayment assistance from builders were particularly poor performers, and Congress killed that program in 2008.
It was Barney Frank's dream but the larger crimes of folly were all done via Bush's Brain while Republicans were in the majority.
ReplyDeleteHomeowners vote, and vote Republican more.
Bush in 2002:
"The goal is, everybody who wants to own a home has got a shot at doing so. The problem is we have what we call a homeownership gap in America. Three-quarters of Anglos own their homes, and yet less than 50 percent of African Americans and Hispanics own homes. … So I've set this goal for the country. We want 5.5 million more minority homeowners by 2010. "
"Fannie Mae, Freddie Mac and the federal Home Loan Banks—the government-sponsored corporations that handle home mortgages—will increase their commitment to minority markets by more than $440 billion, Bush said."
http://web.archive.org/web/20020802155653/http://www.whitehouse.gov/news/releases/2002/06/20020618-1.html
"There are several steps we can take to ensure that America's fastest-growing and most conservative voter bloc joins the GOP. …Home ownership has always been an important element of the American Dream, and Hispanic-Americans have made enormous progress thanks to the hard work of many families and the innovative policies of the president. Hispanic home ownership is at an all-time high with 50 percent of Hispanics owning their homes." -- Ken Mehlman, in 2007
Let the Fed give the FHA some money -- they seem to have plenty of it. Why should the federal government saddle future generations with even more debt over this? If the Fed can conjure up $1.25t to buy MBS, then it can do the same for the FHA for a small fraction of the cost.
ReplyDelete