The FHA Is Just Another Thanksgiving Turkey Whose Time Has Come

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In 2008, when mortgage-backed securities bled rivers of red ink from the slaughtered subprime housing market, Fannie Mae and Freddie Mac rolled over dead in their tracks.

Then, government geniuses scrambled to fix the crisis by pushing forward another sacrificial turkey.

The Federal Housing Administration (FHA), once a New Deal-era agency tasked with helping needy borrowers in rural America get mortgages, became the mortgage market's savior when Fannie and Freddie had to be taken over by Uncle Sam.

Now, four years later–the day before Thanksgiving — that turkey, the FHA, is clucking for its life.

As it turns out, the FHA is now saddled with over a trillion dollars worth of mortgages it insured for a lot less than prime borrowers, and is itself in need of a bailout.

The biggest question now isn't how much the FHA will cost taxpayers.

It is whether or not a struggling FHA will become another setback for the housing market and the economic recovery.

Surprise, Surprise…There's Trouble at the FHA

It's not as if no one saw this coming. I wrote about where this was headed back in July 2008 and again on March 22, 2011.
Amazingly, on the heels of the subprime crisis, the FHA, which doesn't originate mortgages or lend money, but provides government-backed insurance to lenders against mortgage borrowers defaulting, was insuring borrowers who only had to pony up a 3% down payment and needed a FICO score of only 550.

On top of those easy terms, the FHA allowed sellers (mostly builders) to lend or finance the borrower's tiny down payment.

Just because the FHA subsequently raised the required down payment to 3.5% and FICO scores to 580, it's impossible not to see that not having any "skin in the game" and being able to essentially borrow more than 100% of the cost of a home are some of the exact same idiotic allowances that fue led the subprime bubble.

Of course, the government, not wanting to see housing prices fall further because mortgage money became impossible to get after the credit crisis, stuffed the FHA with unpalatable giblets when it raised the maximum loan they could insure from $362,790 to $729,750.

The problem today with the FHA is that they are supposed to keep a 2% "reserve" as a safety net against defaulting borrowers whose mortgages they have insured. They haven't had anywhere near that amount in their reserves in over four years.

With $1.1 trillion in outstanding guarantees, a 2% reserve would be $20 billion. But the FHA only has about $600 million, which it is burning through daily.

And it's getting worse…

Serious delinquencies, loans more than 90-days past due, are rising and are now approximately 9.6% of all the mortgages insured. That's a theoretical exposure of 9.6% of $1.1 trillion, or $96 billion, and counting.

The fact that the FHA was stuffed like a turkey for slaughter isn't surprising. It's just another example of our government kicking yet another can down the road.

Only, this is another turkey that isn't going to make it across the road.

Happy Thanksgiving.

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Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Short-Side Fortunes, Shah shows the "little guy" how to make massive size gains – sometimes in a single day – by flipping large asset classes like stocks, bonds, commodities, ETFs and more. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

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  1. David in MA | November 21, 2012

    Force the banks that received "stimulis" funds to re-write mortgages.
    Then disband the FHA (and other money losing govt. agencies) and let
    private enterprise solve this problem.
    OH! BTW, overturn obozocare, kill the Fed, arrest bieneke and gautheir,
    and impeach or arrest the criminals in the obozo administration.
    (do socialists celebrate thanksgiving?)

  2. frank stankis | November 21, 2012

    The actual possibility of loss is not the mortgage value but a percentage since the property will have a value, that is like 70% of the mortgage face value. Not good news, but not as bad as the author specifies. I believe the agency will be the backbone of the housing industry resurgence that in now in process, since it takes an organization with almost infinite resources to insure the new mortgages. They will allow people to build and sell houses to those who have only a portion of the amount of purchase to buy the property. which is not the case in many countries, but is helpful to our economy where so many jobs depend on construction.

    • Jenkins | November 23, 2012

      Actually Frank, FHA is experiencing a loss rate on foreclosures of 71% of the mortgage amount. Put another way, they only have a net recovery of 29% of the loan amount on foreclosures.

  3. Kevin Donnelly | November 21, 2012

    How is this FHA insurance of sub-prime lending (mortgagees do not have skin in the game) any different than the credit default swaps (or whatever they were called) issued by AIG. before it had to be bailed out by the government? Is it that in this case individual mortgages rather than desicated slivers of mortgages are in the hands of "Investors", and can thus be more easily re- imbursed by FHA to the investor if the mortgage fails to perform on a one by one basis?

  4. H. Craig Bradley | November 21, 2012

    GOVT. INSURED MORTGAGES HAVE A LONG HISTORY OF DEFAULTS

    Let me give you a real case I am personally aware of, first hand, and some hard facts to back it up.

    Back in the early eighties, I worked on the Rifle Ranger District of the White River Nat'l Forest in Rifle, Colorado as a permanent Range Technician. A co-worker and hunting partner ( Bernie Rios) was a Staff Wildlife Biologist in Glenwood Springs with the White River Nat'l Forest- Forest Supervisors Office. So, anyone who still believes the "U.S. Forest Service" only does "Forestry" is either stupid or about 40 years out-of-date and still stubbornly uninformed after so many years. Its quite amazing to me. Yep, its become quite personal over time. Stupid is a big turn-off with about half the population.

    Similarly, the last major economic downturn in the early eighties affected real estate, particularly in Western Colorado after the price of oil collapsed and (Exxon) Oil Shale Operations were effectively shut-down in May, 1983. The local real estate market tanked after that. Bernie Rios transferred to Portland, Oregon in the late eighties and "walked away from his VHA insured loan" ( He defaulted, according to his own verbal admission). Moreover, it was intentional. I suspect FHA borrowers did likewise in hard hit rural areas. There are fewer jobs in most rural areas and the jobs available pay substantially less than in regional urban centers such as Denver, Colorado.

  5. DCAPN@HOTMAIL.COM | November 22, 2012

    I'm pretty sure that Frank Stankis is right: the FHA is a necessary dragon (or anchor if you prefer). I also agree with the capitalists who weighed in above: mortgages should only be given to the wealthy: those who have inherited wealth, professional ball-players, successful drug-dealers, and anyone else who has made enough money (so they really don't need mortgage-insurance) by other occupations that don't really contribute to the real well-being of our societies. Wage-slaves and those on fixed incomes should be kept from home ownership so they can serve as tenants to those who are fortunate enough to become owners. I mean how can you reasonably insure a mortgage for a job-holder when jobs no longer have any security?

    • Ted | November 28, 2012

      You certainly espouse the perspective of the proletariat. Perhaps you should learn the difference between what you call the 'wealthy' and the 'worthy'. Having financed many who aren't affluent but who were at least fiscally prudent and self reliant I can confirm a three times higher probability of success of ownership for those who have worked, saved, and invested their own hard earned money vs those who have no real capital in the home but who are dependent on subsidies, government programs, welfare, and social handouts to provide ownership benefits that many more evolved and independent Americans work for and earn for themselves. Someday maybe even the intellectually challenged and the economically uneducated will come to understand that as human beings we value that for which we sacrificed and care for that which we truly earned by our own merit.

  6. H. Craig Bradley | November 22, 2012

    THE POLITICS OF PAIN AND GAIN

    The Federal Government, most states, their voters and residents are simply incapable of any meaningful budget/fiscal reform. The chances of the United States Government (Congress) voluntarily resolving its debt problems is about nil ( the late Senator Warren Rudman). Therefore, it will take a major crisis such as a huge spike in inflation or interest rates to get their undivided attention and force the necessary policy reforms.

    Of course, we loose most budget flexibility by that time and the pain for the taxpayers will be that much more severe as a result. Kicking the can down the road sounds good, but its really the least desireable course of action for most ordinary people.

  7. BILL | November 25, 2012

    IMPEACH OBAMA GET SOMEONE WHO CARES ABOUT THIS COUNTRY NOT A MUSLIM SOCIALIST

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