01.22.2010 original publish date
01.21.2011 repaired broken link
FHA’s New Move to Shore up Balance Sheet Likely to Increase Foreclosures
original article written by Net Advisor™
One of the key players in the housing boom and bust has been HUD and the FHA.
I cited last year about how poorly the FHA has been ran over the last 75 years that helped lead to this housing/bust.
09.18.2009 Article:
FHA: After 75 Years, Welcome to Risk Management
The FHA the federal government agency that insures roughly HALF of all mortgages in the USA. But if you factor in guarantees from other government agencies, the US government backs 80% of all US mortgages.
“Through FHA, the Veterans Administration, Fannie Mae and Freddie Mac, taxpayers now guarantee repayment on more than 80% of all U.S. mortgages.”
— Wall Street Journal, 09-29-2009.
As mortgage foreclosures have skyrocket over the last 2 years, the FHA has been taking on losses like contractor trying to sell a toxic waste dump to the EPA.
“U.S. foreclosure actions shattered all records in 2009 and will do so again this year, with unemployment and wage cuts overcoming programs to remedy failing home loans, RealtyTrac said…”
— Reuters, 01-14-2010.
The Obama Administration has not helped the housing market as they thought they could. The reality is only 17% of homeowners saw a modification to their beleaguered home loan. And the majority have re-defaulted on the modified home loan within 12 months.
“Every single (government) policy we’ve seen has merely kicked the problem down the road,” said Laurie Goodman, a veteran analyst at broker-dealer Amherst Securities Group LP, which specializes in residential mortgage-backed securities.”
— Reuters, 10-13-2009
So the housing modification has not worked as hoped. Millions of people still cannot afford to live in their homes. Now what?
Let’s INCREASE the mortgage insurance on the homeowners, thus increase their mortgage they can’t afford, and this will help the FHA’s balance sheet from increased mortgage defaults?
Why would you increase the cost on a mortgage when someone can’t afford the mortgage in the first place?
This is government genius at work.
Let’s take a look at all the people who may be barely affording their mortgage payment. Now let’s increase that payment so now they are in the red each month. How long does that last before they give up or are foreclosed on?
Now all the homeowners who can afford their home are also been penalized (subsidizing) the bad loans by everyone else. Is that fair?
The mortgage insurance fee will increase about 28% from 1.75% to 2.25%. Given the economy, this is a bad idea. But what choice does the FHA have? A tax payer bailout? Probably.
FHA Increased Risk While Everyone Else Moved to Decrease Risk.
We have heard since 2008 that banks, brokers and other institutions have moved to de-leverage their risk. However FHA has INCREASED their leverage (risk) every year at least since 2006 – the top of the real estate market. This is not a slight increase; it is a HUGE increase in risk. First a little history:
Yes, After 80+ Years, We Still Have Not Learned.
One of the factors that accelerated the Crash of 1929 was leverage. At the time, a person could invest $1.00 and leverage (borrow, also known as “margin“) $10.00.
This can make you a lot of money if the market is going up. In the event of a decline however, you will be losing money 10x faster than you would if you were not leveraged. And if you don’t have the money to pay a margin call because your cash reserves are not sufficient to cover the loan, you lose it all, and so does the person who issued that loan, hence, the massive bank failures during the Great Depression.
Since the Depression the new rules for stock buying is that one cannot exceed 2-1 leverage (margin) except for qualified accounts that act as a pattern day trader. Business and government operate as they see fit.
Bear Sterns leveraged themselves 33-1, Lehman Brother 24-31x leverage. In big dollar terms, if you have $1 billion in reserves, and leveraged 33-1, if you start taking losses (unhedged), you could be looking at $10’s of billions in losses quickly and that number only magnifys if losses continue, because you are losing $33.00 for every $1.00 invested. Ouch.
At the top of the real estate market, 2006, FHA was leveraging 14-1. By 2009, FHA’s leverage soared to about 50-1, or about a 350% increase in leverage at a time when banks and brokers were collapsing when the housing and credit markets went south, forcing banks and brokers to dramatically and rapidly decrease their high leverage. During this same period, the FHA’s reserve cash balance decreased by 66%. (Source: Wall Street Journal, 09-29-2009).
So why didn’t the FHA seek to decrease its risk? Good question. The answer is, the FHA had no risk management program in place since they began operating just over 75 years ago. According to the U.S. Government (HUD):
“(The) Federal Housing Administration (FHA) Commissioner David H. Stevens today (09-18-2009) announced plans to implement a set of credit policy changes that will enhance the agency’s risk management functions. Stevens also announced his intention to hire a Chief Risk Officer for the first time in the FHA’s 75-year history.”
— Housing & Urban Development (HUD), 09-18-2009
As the Obama Administration publicly chastises Wall Street every week or more like daily as it seems; and even though Wall Street doesn’t make home loans, its the banks that do that sort of thing, government is becoming bigger and bigger and taking on more and more risk at tax payers expense.
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