And Then That Little FHA Bombshell: Next Taxpayer Bailout? Take a Lesson From Hostess

I hate to put a damper on your holiday week, but hope you saw this item: the agency responsible for guaranteeing most of our housing loans, may need a bailout: FHA. The agency doesn’t make loans, but it backs lenders if borrowers stop paying, like a nice parent or co-signee. With this guarantee in place, banks are more comfy offering mortgages to borrowers with lower credit scores or incomes. It also allows prospective homeowners to buy property with down payments as low as 3.5%, such as first time home-buyers. So even with 872,000 new housing starts in September, home prices up nationally by 11.7% and us  humming right along with a 29% increase in home sales in North Texas in October, we hear the FHA may be headed to the ER:

The Federal Housing Administration, which has played a critical role in stabilizing the housing market, said it ended September with $16.3 billion in projected losses — a possible prelude to a taxpayer bailout.

The precarious financial situation could force the FHA, which has been self-funded through mortgage insurance premiums since it was created during the Great Depression, to tap the U.S. Treasury to stay afloat.

The agency said a determination on whether it needs a bailout won’t come until next year.

The FHA is required to maintain enough cash reserves to cover losses on the mortgages it insures. But in its annual actuarial report to Congress, the FHA said a slower-than-anticipated housing market recovery has led its reserves to fall $16.3 billion below anticipated losses.

The FHA’s cash reserves aren’t supposed to drop below 2% of projected losses. They ended the 2012 fiscal year at -1.44%, down from the seriously low level of 0.24% at the end of 2011.

Isn’t it interesting how we didn’t hear one peep about this BEFORE the election, just AFTER?

So it’s a delinquency problem of people not paying their mortgages, and FHA cannot keep up: 11.14% hosed them in September, down from 11.89% in June, and 12.09% in 2011. But the super delinquent category (more than 90 days past due) is up from 8.39% in 2011 to 8.54% in 2012. Which is weird because A,  the “housing market is back rah rah!” and B, everyone is supposed to be making more careful loans, not just handing out money to anyone who fogs a mirror like they did in the boom without checking to see if they could actually pay back the loan which got us here. (Whew!)

And as usual, my mantra: the midde class will get hosed. FHA insures some 16% of home purchases (in 2010, ’twas 19.1%), and they’ve taken steps to mitigate the loss — which include mortgage insurance rate hikes and keeping borrowers paying even after their loan reaches 78% value of the home — or they have a 12% equity. In other words, more skin in the game. And I think they are going to try to unload the bad super delinquents through short sales etc — good.

But lest we panic — Fiscal Cliff ? — this does not mean that FHA has insufficient cash to pay its claims or needs a cash infusion, it says. Last Thursday the Department of Housing and Urban Development, which oversees FHA, said there’s only a 5% chance the agency will run out of cash in the next seven years. The decision about whether FHA needs an infusion will be determined by the calculations used in President Obama’s fiscal 2014 budget proposal, released in February.

Now I’m panicking.

We all know how much this administration loves housing. Let them eat rentals. Already the folks at The Atlantic say it’s time to end the government’s  “massive and distorted” support of housing.” Four words: First time homebuyer’s credit. “End lending to people who cannot afford to repay their loans” (we have); “help homeowners establish meaningful equity in their homes” (how, higher down payments they don’t have since they’ll be paying higher taxes?)”return to the agency’s historical roots: help the truly needy” (defined as…). “Finally, step back from markets that can be better served by private lenders and insurers.”

Right. Ever heard of Dodd-Frank? Get this:

FHA’s FY 2012 Actuarial Study for its main single family program shows that its capital position has turned negative, by $13.5 billion. That’s a shift of $23 billion in economic value in a single year, and it puts the 78-year-old agency $34.5 billion short of its legal capital requirement.

If it were a private company, it would be shut down.

Really? On a 5% chance the agency will run out of money? For God’s sake, even the Hostess Twinkie company is going to mediation to avoid a shut down – surely we can figure something out for housing?