Interest Rate Roundup

Friday, October 09, 2009

FHA next in line for a bailout?

There's an interesting debate going on in D.C. right now over the FHA loan program. FHA was a non-player during the housing boom because private lenders were falling all over themselves to offer crappy loans to crappy borrowers. Now they're out of the business ... and all those crappy borrowers are going to FHA instead. FHA volumes are surging, and questions are being raised about whether FHA has the reserves to cover the rise in defaults resulting from its easy money lending.

Will a bailout be required down the road? Only time will tell. But my opinion is that FHA is taking on too much risk given our recent disastrous experience with low down payment lending to borrowers with questionable credit. So the chances are better than even we will. More from a Washington Post story below:

"A former Fannie Mae executive warned a House panel Thursday that the Federal Housing Administration is destined for a multibillion-dollar taxpayer bailout in 24 to 36 months, an analysis that the agency's top official immediately dismissed as "completely unfounded."

"At a hearing before a House Financial Services panel, Edward J. Pinto predicted that the FHA will suffer $40 billion in losses, leaving it unable to cover its bad loans without taxpayer help. Pinto, a real estate finance consultant who served as Fannie Mae's chief credit officer from 1987 to 1989, said he testified so lawmakers would "not be able to say that no one told them of the magnitude of the impending losses."

"His testimony came at a sensitive time for the FHA, which faces increased scrutiny now that it has backed nearly a quarter of all loans made this year. The loans it insures are the sole source of financing for most people who lack good credit or cannot make hefty down payments. But its defaults have been climbing, raising concerns that taxpayers may be forced to kick in if bad loans overwhelm the FHA.

"The agency recently said that a soon-to-be-released audit will show that its reserve fund has fallen below the level required by law, meaning it will not be enough to cover 2 percent of all outstanding FHA mortgages.

"But absent a catastrophic decline in home prices, "we will not need a bailout," FHA Commissioner David H. Stevens told the panel."


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