As a result of these ballooning market share gains during an extremely deflationary period for home prices accompanied by high unemployment, many of these new loans are now delinquent or defaulting. Accordingly, the losses thereon have been much higher than assumed based on historical experience. Thus, it looks like FHA bailout time by the taxpayer is right around the corner.
The recent losses have been magnified by rapidly rising home-loan defaults and falling home prices. Together these two factors are generating big losses as foreclosed homes are sold. Not a happy situation, for sure.
And the worst part is that it's only one example of the enormous but largely hidden government costs incurred while unsuccessfully trying to rescue housing these past few years. But for now let's stick with the FHA story. We'll get to Fannie Mae and Freddie Mac later.
The FHA provided both cheap and readily available credit for willing home buyers. With as little as 3.5% required for a down payment for a government insured loan, home buyers flocked to FHA and loaded up during the 2007-2009 period of tremendous housing stress.
This combination of readily available and cheap money with minimal down payments enabled very bad practices by willing home owners and lenders. Now the taxpayer will be getting the bill.
Since defaults on an unusual number of the home loans made during 2007-2009 have been abnormally high, FHA losses are occurring in big numbers. That's because the agency, backed by taxpayers, is now obligated to step up and take the foreclosure losses. Unfortunately, there are likely to be many more losses ahead.
What's all this mean to taxpayers? More taxpayer sponsored bailouts, for one thing. For another, perhaps considerably more than $250 billion in total unbudgeted losses for relevant FHA, Fannie Mae and Freddie Mac taxpayer backed guarantees as well.
It's not a pretty situation. Nor is it readily transparent to taxpayers. But it's real.
Loan Backer's Cash Runs Low puts the current odds at one in two that the FHA will need a taxpayer bailout next year. Here's part of what an independent audit of the FHA's finances revealed:
"The Federal Housing Administration's cash reserves have fallen so low that there is a "close to 50%" chance the agency could run out of money and require a taxpayer bailout in the next year, according to the annual independent audit of the FHA's finances."
Of course, all the cash in the reserve fund hasn't yet been depleted, but it's in a most precarious position. If home prices continue their decline, which there's good reason to believe they will, then the fund shortly will run out of money and turn to the U.S. Treasury for more funding. How much will depend on what the future holds for home prices, loan defaults, unemployment conditions and the like.
And all things considered, the FHA is small potatoes. Its perhaps greater than $50 billion shortfall pales in comparison to the probable more than $200 billion in other "hidden costs" that the taxpayer is funding with respect to continuing real estate related losses at the two other government agencies, Fannie Mae and Freddie Mac.
How expensive all of this will get is an unknown at this time, but it's not getting much play either in the press or from government officials. The message; taxpayers, beware.
The Housing Lobby Strikes Again issues the following explanation and taxpayer warning:
"This FHA payoff to the housing lobby comes as the agency has had to publicly reveal the extent of its financial travails. In its annual report to Congress Tuesday, the Department of Housing and Urban Development and an independent auditor reported the FHA has a 0.24% capital reserve, well below its statutory 2% minimum for the third year running. Take $1.1 trillion of outstanding loan guarantees divided by $2.6 billion in capital reserves and you get a 422-to-1 leverage ratio, up from 33-to-1 in 2009. By this standard, Lehman Brothers was risk-averse.
So how much would a bailout cost, even before the proposed loan-limit increase? University of Pennsylvania real-estate finance professor Joseph Gyourko noted in a paper last week that FHA "systematically" underestimates future default risk, not least because it lends to borrowers with very little equity in their homes and uses rosy economic assumptions. Mr. Gyourko estimates that FHA is "materially underreserved by at least $50 billion, with the true figure likely higher."
These numbers are no surprise, given FHA's inherently risky business model. It provides 100%, explicitly taxpayer-backed mortgage loans to first-time, moderate- to low-income borrowers. Down payments can be as low as 3.5%, at a time when most private lenders are prudently insisting on 20% after the housing bust. In fiscal 2011, 85% of FHA loans had a down payment of less than 5%.
Like Fannie and Freddie, the housing collapse hit FHA hard. The difference is that the FHA has since become the political class's main substitute for the private subprime lending it once encouraged. As subprime lending vanished after the crash, FHA became the major lender for marginal borrowers. The share of new mortgages it insures has risen to 24% in July, the latest data available, from 6% in 2007."
Other somewhat off-the-taxpayer-radar examples that come to mind are Amtrak and the Postal Service, as well as the underfunded future liabilities associated with Medicare, Medicaid and Social Security promises. These and many other "hidden"(or at least not prominently mentioned) costs make our acknowledged fiscal deficits and the national debt much worse than typically disclosed.
Why must taxpayers continue to endure this ongoing mystery about costs and liabilities in the midst of a growing national financial catastrophe?
Thanks. Bob.
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