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!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Gold Sector Update – What Stance is Appropriate?
      The Technical Picture - a Comparison of Antecedents We wanted to post an update to our late December post on the gold sector for some time now (see “Gold – Ready to Spring Another Surprise?” for the details). Perhaps it was a good thing that some time has passed, as the current juncture seems particularly interesting. We received quite a few mails from friends and readers recently, expressing concern about the inability of gold stocks to lead, or even confirm strength in gold of...
  • Don’t Blame Trump When the World Ends
    Alien Economics There was, indeed, a time when clear thinking and lucid communication via the written word were held in high regard. As far as we can tell, this wonderful epoch concluded in 1936. Everything since has been tortured with varying degrees of gobbledygook.   One should probably not be overly surprised that the abominable statist rag Time Magazine is fulsomely praising Keynes' nigh unreadable tome. We too suspect that this book has actually lowered the planet-wide IQ –...
  • Incrementum Advisory Board Meeting, Q1 2017 and Some Additional Reflections
      Looming Currency and Liquidity Problems The quarterly meeting of the Incrementum Advisory Board was held on January 11, approximately one month ago. A download link to a PDF document containing the full transcript including charts an be found at the end of this post. As always, a broad range of topics was discussed; although some time has passed since the meeting, all these issues remain relevant. Our comments below are taking developments that have taken place since then into...
  • What is the Best Time to Buy Stocks?
      Chasing Entry Points Something similar to the following has probably happened to you at some point: you want to buy a stock on a certain day and in order to time your entry, you start watching how it trades. Alas, the price rises and rises, and your patience begins to wear thin. Shouldn't a correction set in soon and provide you with a more favorable buying opportunity?   Apple-Spotting – a five minute intraday chart showing the action in AAPL on February 1, 2017 - an...
  • Trump and the Draining of the Swamp
      Swamp Critters BALTIMORE – The Dow is back above the 20,000-point mark. Federal debt, as officially tallied, is up to nearly $20 trillion. The two go together, egging each other on. The Dow is up 20 times since 1980. So is the U.S. national debt. Debt feeds the stock market and the swamp. What’s not up so much is real output, as measured by GDP. It’s up only 6.4 times over the same period. Debt and asset prices have been rising three times as fast as GDP for 36 years! Best...
  • Gold and Silver Divergence – Precious Metals Supply and Demand
      Gold and Silver Divergence – Precious Metals Supply and Demand Last week, the prices of the metals went up, with the gold price rising every day and the silver price stalling out after rising 42 cents on Tuesday. The gold-silver ratio went up a bit this week, an unusual occurrence when prices are rising. Everyone knows that the price of silver is supposed to outperform — the way Pavlov’s Dogs know that food comes after the bell. Speculators usually make it...
  • When Trumponomics Meets Abenomics
      Thirty Year Retread What will President Trump and Japanese Prime Minister Shinzo Abe talk about when they meet later today? Will they gab about what fishing holes the big belly bass are biting at? Will they share insider secrets on what watering holes are serving up the stiffest drinks? [ed. note: when we edited this article for Acting Man, the meeting was already underway]   Japan's prime minister Shinzo Abe, a dyed-in-the-wool Keynesian and militarist, meets America's...
  • The Great Wailing
      Regret and Suffering BALTIMORE – Victoribus spolia... So far, the most satisfying thing about the Trump win has been the howls and whines coming from the establishment. Each appointment – some good, some bad from our perspective – has brought forth such heavy lamentations.   Oh no! Alaric the Visigoth is here! Hide the women and children! And don't forget the vestal virgins, if you can find any...   You’d think Washington had been invaded by Goths, now...
  • Receive a One Percent Gift When Buying or Selling a Home
      How to Save Money When Buying or Make More When Selling a Home In your professional capacity and perhaps also in your private life, you may be closely involved with financial and commodity markets. Trading in stocks, bonds or futures is part of your daily routine.  Occasionally you probably have to deal with real estate as well though – if you e.g. want to purchase an apartment or a house, or if own a home you wish to sell.   The people who took this photograph probably want to...
  • Silver Futures Market Assistance – Precious Metals Supply and Demand
      Silver Is Pushed Up Again This week, the prices of the metals moved up on Monday. Then the gold price went sideways for the rest of the week, but the silver price jumped on Friday.   Taking off for real or not? Photo credit: NASA   Is this the rocket ship to $50? Will Trump’s stimulus plan push up the price of silver? Or just push silver speculators to push up the price, at their own expense, again? This will again be a brief Report this week, as we are busy...
  • Unleashing Wall Street
      To Unleash or Not to Unleash, That is the Question... LOVINGSTON, VIRGINIA –  Corporate earnings have been going down for nearly three years. They are now about 10% below the level set in the late summer of 2014. Why should stocks be so expensive?   Example of something that one should better not unleash. The probability that a win-lose proposition will develop upon meeting it seems high. It wins, because it gets to eat... Image credit: Urs Hagen   Oh,...
  • Boondoggles for the Swamp Critters
      Monster or Mozart? BALTIMORE – Investors seem to be holding their breath, like a man hiding a cigarette from his wife. It’s just a feeling, and it’s not the first time we’ve had it... but it feels as though it wouldn’t take much to send them all running.   Actually, they're not going anywhere yet... but there is a lot of overconfidence by those who were very worried when prices were a lot better - click to enlarge.   Meanwhile... we’re coming to a deep...

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