HousingStorm.com

Did the FHA knowingly make bad loans with taxpayer money to prop up the housing prices?

Was it because of political pressure?

Barney Frank says in The New York Times

“I don’t think it’s a bad thing that the bad loans occurred,” he said. “It was an effort to keep prices from falling too fast. That’s a policy.”

So now it’s official policy of the Government to prop up home prices. Ponder that for a few minutes…

Even though it’s been a hot story over the last couple of days, FHA solvency problems are nothing new.

Back in the beginning of September, we discussed FHA: The Next Bailout

…Rising defaults have eaten through the FHA’s cushion. Some 7.8% of FHA loans at the end of the second quarter were 90 days late or more, or in foreclosure, according to the Mortgage Bankers Association, a figure roughly equal to the national average for all loans. That is up from 5.4% a year ago.

Resulting FHA losses are offset by premiums paid by borrowers. Federal law says the FHA must maintain, after expected losses, reserves equal to at least 2% of the loans insured by the agency. The ratio last year was around 3%, down from 6.4% in 2007.

If its reserves fall short, the agency is obliged to notify Congress, which could spark a commotion over the extent to which the government is funding losses in the housing market. Some housing analysts have said losses might lead the FHA to pull back lending, which has helped boost flagging housing demand.

A senior official at HUD, which oversees the FHA, said there is “no risk” that the FHA would require money from Congress if the ratio falls below 2%. Asked about the agency’s capital ratio, the official said a report detailing that number won’t be completed until the FHA’s fiscal year ends Sept. 30.

HUD Secretary Shaun Donovan said in June, “there’s a better than even chance that we will stay above the two percent reserve threshold. That suggests, not just for the 2010 business, but overall for the portfolio, that we’ll more than likely to stay out of a broader need for any taxpayer funding.”

Hmmm…you believe them? Isn’t this what they say over and over again before getting bailed out? It’s no secret the FHA has been making some of the riskiest loans over the last few years. This will be a bloodbath.

Yesterday, Bloomberg reported FHA Shortfall Seen at $54 Billion May Lead to Bailout

“It appears destined for a taxpayer bailout in the next 24 to 36 months,” consultant Edward Pinto said in testimony prepared for a House committee hearing in Washington today. Pinto was the chief credit officer from 1987 to 1989 for Fannie Mae, the mortgage-finance company that is now government-run.

The FHA program’s volumes have quadrupled since 2006 as private lenders and insurers pulled back amid the U.S. housing slump, Pinto said. The jump has left the agency backing risky loans and exposed to fraud in a “market where prices have yet to stabilize,” he said.

…

About 14.4 percent of FHA loans were delinquent as of June 30 and 2.98 percent were already being foreclosed upon, according to the Mortgage Bankers Association. The combined percentage for all mortgages was a record 13.16 percent, according to data from the Washington-based trade group, which said the share of FHA loans past due is being suppressed by the large amount of new debt.

Not surprisingly, The National Association of Realtors gave a statement that made so sense:

Boyd Campbell, testifying on behalf of the National Association of Realtors, said the FHA has helped avoid a worse collapse.

“Due to solid underwriting requirements and responsible lending practices, FHA has avoided the brunt of defaults and foreclosures facing the rest of the real estate finance industry,” Campbell said in his prepared testimony.

Yves Smith had made an interesting point over at Naked Capitalism

The FHA has ALWAYS been in the low down payment business! It has long offered loans requiring only 3% down, long before “subprime” was part of the lexicon. Historically, FHA loans did not show default rates materially worse than prime loans. That experience has been replicated by not for profit lenders in low income neighborhoods.

In fact, when subprime became a big business (the post 2000 incarnation; there were subprime mortgages in the 1990s, but those were mainly for manufactured housing), it first took share from FHA and then expanded the market. And the big difference from how the FHA once did business versus its subprime competitors was…..the FHA screened loans on an individual basis. The process was time consuming and somewhat intrusive. Private lenders were faster, easier, and (lo and behold) less stringent.

My objection is that the (New York Times) article implies that low down payment loans are a bad idea. They aren’t necessarily. Low down payment loans can be a viable business, but lenders need to screen borrowers much more carefully than when they have a much bigger loss cushion.

And using low down payment loans as a way to prop up the housing market IS a bad idea. The fact that the FHA is cranking so many loans through more or less the same administrative platform is strong evidence that its lending standards have gone out the window.

This FHA train-wreck has been happening slowly over the last few years now. That they need money should be a surprise to no one (excluding most Realtors).

Clearly, lending standards should have been tightened years ago, but they weren’t. Why? Because Government “policy” is to help keep home prices from falling; and they are willing to spend billions of taxpayer dollars to prop them up.

Got that? Our elected leaders are spending billions of our dollars to make our own homes more expensive…higher mortgage payments, higher property taxes…

Thank you, Barney Frank.

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