Wednesday, November 07, 2012

Pete the Banker: Obama's Election Surprise! Obama May Setting Up to Bail Out FHA

The FHA has been making 90% - 95% loan to value mortgages and it looks like delinquencies are going through the roof. 
 
This has been going on for a while and this Administration has done little to resolve the growing problem. So the question is:
 
“Will the federal housing agency soon seek a taxpayer rescue?.
 
The Obama Administration has postponed all kinds of business past Election Day, so expect to see more than one November surprise in the coming weeks. One of the more unpleasant could come from the Federal Housing Administration, which now guarantees about 15% of all U.S. mortgages.
 

The Department of Housing and Urban Development is scheduled to file its annual, independent actuarial report on the FHA this month, and market scuttlebutt is anticipating a big financial hole. The agency was careening toward a taxpayer bailout earlier this year until the feds and state Attorneys General plugged the hole with about $1 billion from a $25 billion bank settlement.
 
So it's reasonable to forecast that the red ink could run heavy, which could mean the agency has to go hat in hand to taxpayers for the first time in its 78-year history. From 2007 to 2009, the FHA doled out insurance on low down payment loans to borrowers with high debt ratios—a risky strategy even when markets are healthy. As of June 30, 25.82% of FHA's 2007 loans, 24.88% of its 2008 loans, and 12.18% of its 2009 loans were seriously delinquent.
 
The FHA has been raising premiums and writing new business with ostensibly better customers, but the new income may not be enough to offset losses from the earlier loans. American Enterprise Institute scholar Ed Pinto estimates some 80% of the FHA's loans are four years old or younger, yet the agency had a negative $1.7 billion cash flow in the fiscal third quarter ended June 30.
 
The Obama Administration has been downplaying the FHA's woes until recently. HUD Secretary Shaun Donovan told a Senate committee in February he was "confident" the feds were "taking responsible steps to protect the FHA fund." The same day, acting FHA Commissioner Carol Galante told a House committee the "FHA is not broke."”
   
From a WSJ article earlier this year, the WSJ showing that the OMB estimated FHA reserves at $4.7Billion and now the agency is burning through about $1.7B/quarter? 
 
“The estimates by the White House's Office of Management and Budget show that the FHA's capital reserves, which stood at $4.7 billion in October, would be wiped out in the coming year, forcing the agency to seek nearly $700 million from the U.S. Treasury.”

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