FHA May Be Next In Line For A Bailout

For seventy five years FHA has been making loans and never has it had to ask the U.S. taxpayer for a dime. That may be about to change.

Rising defaults are seriously depleting the agencies reserve fund. About 7.5% of its loans are seriously delinquent versus 6.2% a year earlier. Its reserve fund is down to about 3% from 6%. By law it must be maintained above 2%.

At a Senate committee hearing the agency’s Secretary, Shaun Donovan, dodged the bailout question. The closest he came to acknowledging it may be on the table was his statement that, :”Based on the numbers we’re seeing, I think it’s going in the wrong direction.”

Perhaps the most distressing about this development is the speed with which the quality of FHA’s portfolio has declined. It took Fannie and Freddie perhaps a decade to destroy themselves. FHA on the other hand has until the last 24 months been an afterthought. In 2006 it accounted for about 2% of originations. Now it originates almost a third of all mortgages.

It would be easy to blame these bad fortunes on the lousy economy. That seems too easy. Remember we’re talking about an agency that has a 75 year history of managing through recessions. This one has been severe but no more so than two or three of the others that it has faced. No, something else is at work here. I frankly don’t know what it is but I think it would behoove us to figure it out.

I’m not sure that Washington really gets it though. Witness this from Mr. Donovan:

In an interview Wednesday, Mr. Donovan said that the agency may need to sustain losses to keep backstopping lenders who otherwise wouldn’t make loans. “[W]hile we’re rightly concerned about the safety and soundness of FHA…we also need to be focused on the fact that credit is critical to the economic health of the country,” he said.

That sounds terribly familiar. Just keep pumping out the loans. If things go wrong, there is always the taxpayer to fall back on. Lord, what will it take to put this right?

more: here

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