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 are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • LA5H5981sc
President George W. Bush presents the Presidential Medal of Freedom to Federal Reserve Chairman Alan Greenspan, one of 14 recipients of the 2005 Presidential Medal of Freedom, awarded Wednesday, Nov. 9, 2005 in the East Room of the Whiite House.  White House photo by Shealah CraigheadAlan “Bubbles” Greenspan Returns to Gold
      Faking It   Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. […] The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. — Alan Greenspan, 1961   He was in it for the power and the glory... Alan Greenspan gets presidential bling...
  • William SimonEnd of an Era: The Rise and Fall of the Petrodollar System
      The Transition   “The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros. The sooner the better.” Ron Paul   A new oil pipeline is built in the Saudi desert... this one is apparently destined for the Ghawar oil field, one of the oldest fields in Saudi Arabia...
  • Vote Early Zombie at Sharpstown High SchoolWriting on the Wall
      Time to Sell... Maybe BALTIMORE – Yesterday, the S&P 500 hit a new all-time high. And the Dow just hit a new record close as well. If you haven’t sold yet, dear reader, this may be one of the best times ever to do so.   It's still flying... sorta. Meet Bill Bonner's tattered crash flag Image credit: fmh   We welcome new readers with a simple insight: Markets are contrary, pernicious, and downright untrustworthy. Just when the mob begins to bawl most loudly...
  • croesus_av_stater_1Gold – Eerie Pattern Repetition Revisited
      Gold Continues to Mimic the 1970s Ask and ye shall receive... we promised we would update the comparison chart we last showed in late November in an article that kind of insinuated that it might be a good time to buy gold and gold stocks (see: “Gold and Gold Stocks – It Gets Even More Interesting” for the details). We are hereby delivering on that promise.   A Lydian gold stater from the time of the famously rich King Croesus, approx. 570 BC. It seems they already had this...
  • robot tradersA Fully Automated Stock Market Blow-Off?
      Anecdotal Skepticism vs. Actual Data About one month ago we read that risk parity and volatility targeting funds had record exposure to US equities. It seems unlikely that this has changed – what is likely though is that the exposure of CTAs has in the meantime increased as well, as the recent breakout in the SPX and the Dow Jones Industrial Average to new highs should be delivering the required technical signals.  The bots keep buying... Illustration via...
  • Toscana_Siena3_tango7174The Central Planning Virus Mutates
      Chopper Pilot Descends on Nippon Readers are probably aware of recent events in Japan, the global laboratory for interventionist experiments. The theories of assorted fiscal and monetary cranks have been implemented in spades for more than a quarter of a century in the country, to appropriately catastrophic effect. Amid stubbornly stagnating economic output, Japan has amassed a debt pile so vast since the bursting of its 1980s asset bubble, it beggars the imagination.   A...
  • tokyo whaleDestination Mars
      Asset Price Levitation One of the more preposterous deeds of modern central banking involves creating digital monetary credits from nothing and then using the faux money to purchase stocks.  If you’re unfamiliar with this erudite form of monetary policy this may sound rather fantastical.  But, in certain economies, this is now standard operating procedure.   The “Tokyo Whale” Haruhiko Kuroda explains his asset purchase madness with a few neat little slides. Photo credit:...
  • The-Deep-State-Mike-LofgrenAmerica Has Become a “Parasitocracy”
      Dread and Denial So, let’s return to the discussion you can’t have with your congressman, your mailman, or your barmaid. It’s the important one. It concerns what the Fed is really up to.   Eight years after achieving independence, a State modeled after the British merchant state was established in the US. It took a while for the Deep State to consolidate itself within it, a process that was accelerated greatly in the run-up to and aftermath of WW I. Illustration by Ana...
  • London-City-Scene lo rezFat People for Trump!
      Alphas and Epsilons BALTIMORE – One of the delights of being an American is that it is so easy to feel superior to your fellow countrymen. All you have to do is stand up straight and smile. Or if you really need an ego boost, just go to a local supermarket. Better yet, go to a supermarket with a Trump poster in the parking lot.   The protest vote attractor with the funny hair. Image credit: Liberty Maniacs   Trigger warning: In the following ramble, we make fun of...
  • bristlecone-1000x672Long Term Market Perspectives
      Methuselah Tree When looking for a good theme for this post I pondered for a while and then decided to use a picture of a bristlecone pine, which are widely considered to be the oldest living trees in the world.   Ye olde bristlecone Photo credit: Kosta Konstantinidis   You can find them near the Nevada/California border and if you wind up traveling in the area then I strongly recommend that head over to Bishop and from there head up high up into the White...
  • Juncker, Keqiang, Tusk 2EU Sends Obsolete Industries Mission to China
      “Tough Negotiations” The European press informs us that a delegation of EU Commission minions, including Mr. JC Juncker (who according to a euphemistically worded description by one of his critics at the Commission “seems often befuddled and tired, not really quite present”)  and European Council president Donald Tusk, has made landfall in Beijing. Their mission was to berate prime minister Li Keqiang over alleged “steel dumping” by China and get him to cease and...
  • 12109143_10153644062379417_1863326510450484797_nCelebrating 45 Years of Phony Money
      $300 Trillion in Debt DUBLIN – After our trip to Las Vegas, we spent one night in Baltimore and then got on another airplane. Standing in line, unpacking bags, getting zapped by X-ray machines – it has all become so routine we almost forget how absurd it is.     Get ready to be invaded, citizen... Photo by David McNew / Getty Images   While armies of TSA agents pat down grandmothers and Girl Scouts, ex-soldiers take aim at the police... nutcases run...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

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!
 

Oilprice.com