A $16.3 Billion Hole, They Say


Following the sub-prime bubble's collapse, someone had to take over subsidized lending to people with not enough income to pay back their mortgage loans, or so the thinking among the political class seems to have gone.

To be underprivileged in today's society means two things: 1. you most likely enjoy amenities that would have been the envy of every king of 150 years and longer ago, and 2. you can't afford buying a house.

The latter is regarded as a defect in need of rectification, predominantly by the political left, but as some readers may recall, the 'ownership society' was propagated in this context by the right as well.

It was apparently not enough to drive the GSE's Fannie and Freddie into bankruptcy and conservatorship by a combination of reckless monetary policy and equally reckless political mandates regarding the provision of lending to the above mentioned 'underprivileged' class at conditions that can only be called insane.


No, the FHA had to be driven to the wall as well. Well, mission accomplished, as they say. With qualifying borrowers only needing 3.5% down payments, it was clear that the FHA would pick up precisely where a great many now broke subprime lenders left off. Thus 25.82% of its 2007 loans, 24.88% of its 2008 loans and 12.18% of its 2009 loans are now delinquent. The total insured FHA mortgages amount to $1.13 trillion, so there is a big tab coming down the pike for the tax cows.

Not surprisingly, a recent audit found the agency to be short a dollar or two, or more precisely, $16.4 billion (and presumably, counting). It appears in fact as though this number may be an artificially low-balled estimate.



According to press reports:

“The U.S. Federal Housing Administration is facing likely losses that will swamp its capital and fuel a $16.3 billion deficit, but the Obama administration plans to take steps to try to avoid the need for taxpayers to bail out the loan insurer.

An independent audit found a gauge of the agency's capital adequacy had dropped into negative territory, the Department of Housing and Urban Development said on Thursday.

The findings likely mean the agency, which insures about one-third of all U.S. mortgages, will need taxpayer funding for the first time in its 78-year history. They also appear certain to fuel a long-standing debate on the government's role in supporting the housing market.

The audit showed the FHA had exhausted the capital it would need to cover losses on the $1.1 trillion in loans it guarantees. It is legally required to maintain a 2 percent capital ratio, which is a gauge of its ability to withstand losses, but it has not met that target in almost four years.

The audit found that the ratio had dropped to negative 1.44 percent, representing a negative economic value of $16.3 billion, the department said.

"During this critical period in our nation's economic history, FHA has provided access to homeownership for millions of American families while helping bring the housing market back from the brink of collapse," HUD Secretary Shaun Donovan said in a statement.

An audit last year found the FHA, a primary source of funding for first-time home buyers and those with modest incomes, faced a nearly 50 percent chance of needing a bailout. Full details of the latest audit will be released on Friday. The FHA has never needed an infusion of funds from the U.S. Treasury because it has been able to take other actions, including raising insurance premiums, to stay solvent.”


(emphasis added)

Mr HUD secretary seems to be saying: “even if we eventually manage to lose so much money that the tax cows will have to bail us out (because other avenues to plug the holes in the balance sheet turn out to be insufficient), it is 'critical' that we continue to make loans a quarter of which appears to become delinquent in short order”.



The FHA's capital ratio over time (chart via CLSA); at the height of the bubble, it appeared to be in fine fettle. Since then it has become the major subprime lender, with results that are exactly similar to the experience of the previously extant subprime lenders – click for better resolution.



Actually, it's a $32.8 Billion Hole!

It turns out that if one digs a little deeper, the FHA's capital ratio deficit is actually twice as big as currently advertised.

According to the Investors Business Daily:

“Ed Pinto, a resident fellow at the conservative American Enterprise Institute, says the truth is even worse.

"Today's report is already obsolete and outlines a conservative estimate of the true losses incurred by the FHA," he said.

FHA's actuarial study, he notes, assumes 10-year Treasury yields will average 2.2% in Q3 2012, soaring to 4.59% in 2014. It also assumes mortgage rates will double to 6.58% by late 2014.

But a low-rate scenario is more realistic, Pinto claims. The 10-year Treasury yield is 1.58% now. In September the Federal Reserve said it would keep the federal funds rate near 0% likely through mid-2015, suggesting that mortgage rates are unlikely to rise soon.

Deep in the FHA's actuarial analyses, capital reserves would be -$32.8 billion in a low-rate scenario. Low rates would let good borrowers refinance, leaving the FHA with the bad loans.

That's a far cry from last year when the FHA projected its capital reserve would be $11.5 billion.

The FHA has vastly expanded its exposure to mortgages in recent years, picking up the slack — and risk — from Fannie Mae and Freddie Mac.

The FHA says it will take various steps to improve its finances, such as an uptick in insurance premiums. But it largely blames its capital woes on loans "insured prior to 2010." Over 30% of loans in much of 2008 and 2009 had FICO scores below 640. That's fallen to less than 10% in the most recent quarter.

The FHA claims that the loans "endorsed since 2010 continue to exhibit very strong performance" and the quality of those loans "is the best in FHA's history." But Pinto says that FHA is still making a lot of risky loans, many with with subprime attributes such as FICO scores below 660 and debt-ratios of 50% or more."

FHA data that IBD received bear that out. Of the 900,000 fully underwritten loans FHA insured in fiscal 2012, 39% had FICO scores below 660 and/or a debt ratio of at least 50%.

There are other trouble signs. The FHA paid out on 143,000 claims in fiscal 2012, much higher than the 118,500 it had predicted and above the roughly 118,100 paid in FY 2011.

FHA's delinquency rate has risen as well, going from 16.6% in September 2011 to 17.3% a year later. Some 1.3 million of its nearly 7.7 million outstanding loans are behind on payments.”


(emphasis added)

So in reality it's a $32.8 billion deficit and counting. Note also that the above strongly indicates that the FHA's own forecasts are worth exactly nothing, or perhaps about as much as Ben Bernanke's assessment of the soundness of the housing bubble between 2003 to 2007.  OK, we might as well stick with 'nothing'.




Emigrate While You Can... Learn More




Dear readers - we want to once again thank all of you who have supported us with donations.


To donate Bitcoins, use this address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke


Thank you for your support!

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • testa-e-collo-di-cesareWhy Do We Let Other People Tell Us What to Do?
      Lame Theories of Government We have been disappointed with political ideas and theories of government. They are nothing but scams, justifications, and puffery. One tries to put something over on the common man… the other claims it was for his own good… and the third pretends that he’d be lost without it. Most are not really “theories” at all… but prescriptions, blueprints for creating the kind of government the “theorist” would like to have. Not surprisingly, it is a...
  • goldmine-700x360Gold and Gold Stocks – Back to Tricky, but Interesting Signals Emerge
      A Relentless Short Term Decline When we last discussed the gold sector, we noted that with gold approaching its 200 day moving average, a pullback had to be expected soon. In the meantime, a bit more than just a pullback has happened, as a severe sell-off started after the October FOMC announcement.   Photo via genius.com   However, as you will see below, this has most likely merely reset the clock a bit in terms of anticipating a medium term trend change (even if...
  • MponengGold and Gold Stocks – It Gets Even More Interesting
      Technical Backdrop If only we could get a dime for every bearish article on gold that has been published over the past two weeks...but one can't have everything. When a market is down 83% like the HUI gold mining index is, we are generally more interested in trying to find out when it might turn around, since it is a good bet that it is “oversold”. Of course, it if makes it to 90% down, it will still be a harrowing experience in the short term. We like these catastrophes because...
  • resultThe Greatest Racket of All Time
      The Successes of the Global War on Terror One would think that the so-called “Global War on Terror”, which has been given fresh impetus by the Paris attacks, must be going swimmingly. What else could explain the great enthusiasm with which it is pursued? It may be recalled that it started in earnest after the WTC attack – also a declaration of war, as it was put at the time. As is often the case when Islamist fundamentalists strike, the actual attackers immolated themselves on...
  • winterThe Long, Cold Winter Ahead
      Not Immune Cold winds of deflation gust across the autumn economic landscape.  Global trade languishes and commodities rust away like abandoned scrap metal with a visible dusting of frost.  The economic optimism that embellished markets heading into 2015 have cooled as the year moves through its final stretch.   Photo credit: David Byrne   If you recall, the popular storyline since late last year has been that the U.S. economy is moderately improving while the...
  • santaHow Do People Destroy Their Capital?
      There is no Santa Claus I have written previously about the interest rate, which is falling under the planning of the Federal Reserve. The flip side of falling interest rates is the rising price of bonds. Bonds are in an endless, ferocious bull market. Why do I call it ferocious? Perhaps voracious is a better word, as it is gobbling up capital like the Cookie Monster jamming tollhouses into his maw. There are several mechanisms by which this occurs, let’s look at one...
  • oil rigJunk Bonds Under Pressure
      While the Stock Market is Partying ... There are seemingly always “good reasons” why troubles in a sector of the credit markets are supposed to be ignored – or so people are telling us, every single time. Readers may recall how the developing problems in the sub-prime sector of the mortgage credit market were greeted by officials and countless market observers in the beginning in 2007.   Photo credit: Getty Images   At first it was assumed that the most highly...
  • P1060838US Economy – Not Getting Better
      An Update in Light of Recent Data Releases Since our last updates on the manufacturing sector of the US economy (in chronological order: “Is the US Economy Close to a Bust?” and “More Ominous Data Points”), new data have been released and our friend Michael Pollaro has mailed us updated versions of his charts, so we decided to provide another update. So far, there is no sign that the emerging downtrend in manufacturing activity is stopping or reversing. The recent manufacturing...
  • Young-European-Jihadists-ChappatteAngry Belgian Muslims and the Price of Welfare Statism
      Ill-Tempered Mohammedans in the Socialist Paradise In the wake of recent revelations about the identities of the morons involved in the horrific Paris attacks (happily, most of them shuffled off the mortal coil as well, thereby improving the aggregate degree of moral clarity and intelligence in the world), a friend pointed us to an article at Unz Review that asks: “Why Does Belgium Have Such Angry Muslims?” Our instinctive, immediate reaction was to argue that the bland, boring...
  • Chart-intraday averageCan Investors Trust the New Gold Fixing?
      Statistical Analysis of the New Gold Fixing   Since 20 March 2015 a new gold price fixing organized by the London Bullion Market Association has been in operation. It has replaced the previous price determination process, which was in place for more than a century and became subject to criticism as it was highly vulnerable to manipulation. Has manipulation now ceased?   Gold fixing at N.M. Rothchild and Sons offices in London. The first fixing took place there on 12 September...

Support Acting Man




Own physical gold and silver outside a bank

Realtime Charts


Gold in USD:

[Most Recent Quotes from www.kitco.com]



Gold in EUR:

[Most Recent Quotes from www.kitco.com]



Silver in USD:

[Most Recent Quotes from www.kitco.com]



Platinum in USD:

[Most Recent Quotes from www.kitco.com]



USD - Index:

[Most Recent USD from www.kitco.com]


THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Buy Silver Now!
Buy Gold Now!