Previously Unrecognized Government Debt Keeps Growing ... More Government Housing "Help" on the Way in the Form of FHA Loan Guarantees Gone Bad

Government makes lots of promises but doesn't account for them as debt obligations. Perhaps we sould call them "sometimes unacknowledged and often unrecognized, albeit all too real," liabilities.

As a result of this "sometimes unacknowledged and often unrecognized, albeit all too real" government "messaging" problem, most people believe the U.S. national debt is $16 trillion. If only it were so! While $16 trillion represents a mouthful, to be sure, it's not the whole story --- not even a big part of the story. Sad but true.

For one thing, total unfunded entitlement promises such as Social Security and Medicare amount to ~$100 trillion. And for another, unfunded public sector pension liabilities in states and cities amount to an additional $1.5 trillion. And while we're at it, let's not forget future defaults on guarantees for student loans, off balance sheet post office obligations, and federal guarantees on "investment" related debt for Solyndra type debt. Then there all the local government guarantees for sports stadiums and such. But you get the message by now. Just becuase they're not tallied and reported, they're still real obligations of taxpayers in the end. That's what government guarantees are -- contingent taxpayer libailities which frequently come real ones.

So today let's discuss the example of residential mortgage guarantees by taxpayers --er -- government agencies. In that regard, Fannie Mae, Freddie Mac and FHA have guaranteed residential mortgage loan obligations in an amount of perhaps $200 billion.

We'll stop there and look at the smallest piece of the mortgage issue --- the FHA --- which we had previously been assured wouldn't become a financial problem requiring taxpayer assistance. Until now, that is.

Housing Agency Close to Exhausting Reserves tells us what's up with the FHA:

"The Federal Housing Administration is expected to report later this week that it could exhaust its reserves because of rising mortgage delinquencies, according to people familiar with the matter. That could result in the agency needing to draw on taxpayer funding for the first time in its 78-year history.

The FHA's tenuous financial condition would put a spotlight on an often-overlooked housing-market rescue. The New Deal-era agency, which doesn't actually make loans but instead insures lenders against losses, has played a critical role stabilizing the housing market by backing mortgages of borrowers who make down payments of as little as 3.5%—loans that most private lenders won't originate without a government guarantee. The FHA accounted for one third of loans used to purchase homes last year among owner occupants.

Already, the Obama administration has taken a series of steps to stabilize the housing sector since the 2008 financial crisis, including $137 billion spent to bail out Fannie Mae and Freddie Mac. Together with those two companies, federal agencies are backing nearly nine in 10 new mortgages.

The FHA guarantees fewer mortgages than either Fannie or Freddie, but it now has more seriously delinquent loans than either of the mortgage-finance giants. . . .

The decision over whether the FHA will need money from Treasury won't be made until next February, when the White House typically releases its annual budget. Because the FHA has what is known as "permanent and indefinite" budget authority, it wouldn't need to ask Congress for funds; it would automatically receive money from the U.S. Treasury. . . .

The FHA never relaxed its underwriting rules during the housing boom, and its market share plunged as private lenders offered loans on much easier terms. But the agency saw business soar as the housing bust deepened, first in 2007, as private lenders retreated, and later in 2008 and 2009, as Fannie and Freddie tightened credit standards.

Most of the agency's losses now stem from loans made as the housing bust deepened. Around 25% of mortgages guaranteed in 2007 and 2008 are seriously delinquent, compared with around 5% of those insured in 2010. . . .

Throughout the downturn, the FHA has struggled with calibrating the balance between protecting taxpayers and providing credit. . . . "They stepped in at a time when the other instruments of policy weren't available. You couldn't lower interest rates enough to get people to obtain private mortgages," says Douglas Holtz-Eakin, . . . a former director of the Congressional Budget Office. . . .

In each of the last three years, Obama administration officials have shot down the idea that the agency would draw on the Treasury, except under the most dire home-price forecasts."

SUMMING UP

As everybody knows, some elephants in the 'taxpayer contingent indebtedness' room are unfunded entitlement obligations such as public sector pensions, Medicare and Social Security.

Another genuine and largely silent biggie, however, is represented by taxpayer backed loan guarantees issued by government. In fact, with respect to housing loan guarantees, taxpayers are now guaranteeing the repayment of nine out of ten new mortgages.

Accordingly, instead of the officially recognized $16 trillion in federal debt, by far the biggest taxpayer liability is presently unquantifiable. We the People have no way of knowing how much all this will cost us in the end. And the government knows best gang has been more than liberal issuing loan guarantees on "taxpayers' behalf."

In the final analysis, future taxpayers will have lots of debt payments, real and contingent, to make, and will have been left by present taxpayers far too few funds to satisfy those debt obligations.

Thus, my fellow taxpayers, we're going to have to write some really big checks down the road.

Unless, of course, we do the unconscionable and decide to pass the bills on to our kids and grandkids.

But haven't we done enough to them already?

Thanks. Bob.