FHA - A New Bankruptcy & Bailout Dead Ahead

FHA Nearing Insolvency
In some regards 2012 is shaping up to be just like 2008. As Yogi Berra once said, "It's like de'javu, all over again...".  FHA, or the Federal Housing Administration, is on track to go bankrupt sometime next year. Destined by poor loan underwriting, low and effectively no down-payments, the FHA and the US taxpayer will add FHA to the scrap heap of failed programs Freddie Mac and Fannie Mae. Yet FHA continues to crank out loans with no reserves to support them as existing loans continue to rack up losses. The inevitable FHA bailout may eclipse Freddie and Fannie losses combined.


Govt. FHA Becomes New Sub-Prime Lender
As the mortgage industry collapsed in 2008, FHA, the small low down-payment government backed lending agency, stepped in to become the primary market lender spurred by a U.S. Government desperate to prop up a housing market that was dropping like a rock.


FHA became the only primary sub-prime and low/no down-payment lender overnight, tripling the amount of loans it originated. FHA's lending policies effectively kept its required 3.5% down-payment at a theoretical zero, through liberal card tricks like "gift credits", "deposit assignment credits" and "seller rebated amounts" so no borrower money was really at the closing table.  Failing to change their risk modeling based on the new sub-prime client base, FHA's losses have climbed dramatically. Even today, FHA has lagged behind the other failed GSE programs Freddie and Fannie to tighten lending standards, continuing it's lending charade.  


FHA's Dramatic Rise in Loans Made

FHA Sees Crisis Period Loans Failing Much Faster
As anyone but FHA could guess, the old risk models didn't work and almost immediately loans originated in the 2008 crisis and later went bad much quicker and in much higher numbers:

FHA Capital Levels Fall Dangerously Low

• FHA's Required Capital Reserves Level - 2%
• FHA Jan. 2008 Reserves - 3%
• FHA Dec. 2010 Reserves - .50% 
• FHA Dec. 2011 Reserves - .24%

Simple math shows FHA will run out of reserves sometime in 2012. This lack of reserves also prevents FHA from participating in any new homeowner assistance programs since subsidizing loans or lowering standards even further erodes reserves even quicker. In October 2010, FHA raised insurance costs to all FHA mortgage holders in an attempt to pass on losses to you know who, the consumer.


Taxpayer Losses Will Grow On Continued Losses
Losses continue to mount at Freddie and Fannie, the two GSE's (government sponsored entities) that were taken over by the US Treasury in 2008. FHA will soon be added to this list as well:

• Freddie Mac losses to date $70 Billion
• Fannie Mae losses to date $115 Billion
• Estimated total losses through 2013 $221B-$363B

These loss estimates were made in mid 2010. Losses are now feared to be even worse than estimated.  If FHA goes under, and I can't see why it won't, losses will be much higher due to the nature of the lower credit profiles at FHA, and may be double our existing losses.  This will bring the total loss in home mortgages to near $1 Trillion. These losses add to the national debt, but are not added to the our existing annual budget deficits being quoted in the media. What is clear to see is that the governments social experiment of underwriting home ownership for every person in America will be a costly failure.


D.