The second catalyst [for government support of housing to decline] is the FHA, which looks increasingly like it will need a bailout. In its annual report to Congress, released a few weeks ago, the FHA reported estimated economic net worth of $2.6 billion backing $1.078 trillion insurance in force, for a capital ratio of just 0.24% (or 417x leverage). One year ago, the capital ratio was 0.50%, and in 2007 it was 6.4%. The FHA's annual report claims it's adequately capitalized, but this conclusion relies on home prices not falling at all from here. ...
The government will have to pony up to recapitalize the FHA. FHA mortgages are fed into Ginnie Mae MBS, and Ginnie Mae MBS are explicitly backed by the full faith and credit of the United States government. So if the FHA runs out of funds, the government will have little choice but to step up. To do otherwise would be a default – not out of the question these days, but not very likely either.
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| FHA and VA loans fill void left by private lending |
Dr. Housing Bubble weighs in with the big picture (link):
The trend for lower home prices has been baked in for nearly a year now. Last summer we had a mini burst of buyers thanks to artificial tax credits and low interest rates. I still view the current market as being designed for the nothing down leverage happy mentality that is present in our society. You have a large number of buyers purchasing homes with 3.5 percent down FHA mortgages and the default rates are soaring in this category. ...
Over half a decade ago I knew the bigger issue would be the cognitive dissonance that would linger from a post-bubble world. Many now realize that what occurred in the housing market was a once in a lifetime spending binge induced by debt. Yet some still think those days are only around the corner. The global debt crisis will not allow that. This is why most of the mortgage market is now dominated by the government. How many foreign governments or investors are going to trust Goldman Sachs or Morgan Stanley when they drop by their door steps with new mortgage backed securities? I think some have learned their lessons well and the data reflects this.
The housing market was bound to have a day of reckoning and it looks like it is slowly unraveling. It was simply impossible to have a shadow inventory growing with banks just ignoring the reality. We are now going into year five of the housing bubble bursting. You have millions of those in foreclosure who have not made a payment in one to even two years.
Ultimately the burden falls largely on the middle class. The Federal Reserve has a primary mission to protect banks. That is their bottom line. They are not looking out for the best interest of homeowners or working Americans. For the cost of the bailouts and shadow loans, they could have paid off close to every mortgage in the country. Yet even principal reductions were never on the radar because to do that, it would be to admit a financially broken system. Instead they opted to give out $7.7 trillion in backdoor loans to banks and forced the public to deal with “free market” solutions. An interesting situation no doubt but the problems we are now facing are based on this two-tiered system.
Confounded Interest points out (link) just how high the FHA default rates are:
As of October 2011 17.02% of FHA loans were at some stage of delinquency. The serious delinquency rate is 9.05%.
Clearly another government sponsored enterprise is repeating the mistakes of the past as we speak, having destroyed its capital base with non-performing loans swelling its balance sheet. FHA obviously should require down payments which are much higher than 3.5 percent in order to strengthen its bottom line, but it's probably too late to avoid bailing it out for the mistakes it has already made.
The trend for lower home prices has been baked in for nearly a year now. Last summer we had a mini burst of buyers thanks to artificial tax credits and low interest rates. I still view the current market as being designed for the nothing down leverage happy mentality that is present in our society. You have a large number of buyers purchasing homes with 3.5 percent down FHA mortgages and the default rates are soaring in this category. ...
Over half a decade ago I knew the bigger issue would be the cognitive dissonance that would linger from a post-bubble world. Many now realize that what occurred in the housing market was a once in a lifetime spending binge induced by debt. Yet some still think those days are only around the corner. The global debt crisis will not allow that. This is why most of the mortgage market is now dominated by the government. How many foreign governments or investors are going to trust Goldman Sachs or Morgan Stanley when they drop by their door steps with new mortgage backed securities? I think some have learned their lessons well and the data reflects this.
The housing market was bound to have a day of reckoning and it looks like it is slowly unraveling. It was simply impossible to have a shadow inventory growing with banks just ignoring the reality. We are now going into year five of the housing bubble bursting. You have millions of those in foreclosure who have not made a payment in one to even two years.
Ultimately the burden falls largely on the middle class. The Federal Reserve has a primary mission to protect banks. That is their bottom line. They are not looking out for the best interest of homeowners or working Americans. For the cost of the bailouts and shadow loans, they could have paid off close to every mortgage in the country. Yet even principal reductions were never on the radar because to do that, it would be to admit a financially broken system. Instead they opted to give out $7.7 trillion in backdoor loans to banks and forced the public to deal with “free market” solutions. An interesting situation no doubt but the problems we are now facing are based on this two-tiered system.
Confounded Interest points out (link) just how high the FHA default rates are:
As of October 2011 17.02% of FHA loans were at some stage of delinquency. The serious delinquency rate is 9.05%.
Clearly another government sponsored enterprise is repeating the mistakes of the past as we speak, having destroyed its capital base with non-performing loans swelling its balance sheet. FHA obviously should require down payments which are much higher than 3.5 percent in order to strengthen its bottom line, but it's probably too late to avoid bailing it out for the mistakes it has already made.
