Five years after the financial crisis, just about everyone has had to clean up their act.
Consumers have less credit card debt. Banks are stuffed with capital, prodded by the Federal Reserve. Even the federal deficit is shrinking.
But one federal agency seems to have resisted long-overdue change. It's the Federal Housing Administration or FHA.
Findings by a congressional committee, released last week, show the giant government mortgage-insurance agency could face a $115 billion shortfall – at least, if the housing market tanksby 20% again.
The figure is so large the FHA has worked to keep it under wraps for as long it could.
This winter the Fed required the nation's 18 biggest banks to undergo the same sort of "stress test" scenario.
The FHA, though, excluded the results of its stress test from an independent actuarial review released in November – and hoped to release the results later when Congress and reporters weren't paying attention.
In an October e-mail to Integrated Financial Engineering Inc. of Rockville, Md., which conducted the review, an FHA official wrote, "We just do not want that analysis [the stress test results] to be in the actuarial review report."
The e-mail went on to say, "In congressional hearings, it is quite possible that we will be required to present this information on the record, but that will be well after the actuarial review is released and the initial media coverage takes place."
FHA: "Contempt for Congress and Taxpayers"
Edward J. Pinto, a senior research fellow at the American Enterprise Institute think tank, told Money Morning it's an "outrage" FHA didn't release the stress test results in November and that they became public only during the congressional committee's review.
"The employees of FHA hold a public trust," Pinto said. "To withhold this information from the FHA's regulator, Congress, shows contempt for Congress and taxpayers."
The FHA doesn't originate mortgages or lend money but provides government-backed insurance to lenders against mortgage borrowers defaulting, and has taken on a much bigger role after Fannie Mae and Freddie Mac had to bet taken over by the government.
Pinto says under generally accepted accounting principles, the FHA, which now insures over $1.1 trillion in mortgage loans, has a net worth of negative $27 billion.
Given its financial state – the FHA did present as part of the review an estimated shortfall of $65.4 billion based on a "protracted" economic "slump" – Pinto said the agency is one recession away from a disaster.
"The FHA is a mild to moderate recession away from catastrophic losses – losses that would need to be absorbed by taxpayers," Pinto said.
Such losses could total $50 billion, he said.
Pointing to the Great Recession, Pinto said, "FHA's role as the leverage leader was instrumental in promoting the rush to loose lending standards that figured so prominently in the collapse of the housing market and the tanking of our economy."
No Cash Reserves
The FHA, he says, has "no cash reserves to fall back on to protect the taxpayers, and that is the problem."
Pinto, a former chief credit officer for Fannie Mae, says he's not predicting a housing crash right away, but says it's conceivable interest rates could climb to 6% within a year or two – and that would greatly increase the odds of a crash.
And the FHA is making the potential catastrophe bigger and bigger – by easing lending standards and by making too many loans to people outside its original mission of supporting low- and middle-income and first-time buyers, Pinto says.
He says the FHA needs to change underwriting standards to bring down foreclosure rates, which he says have been about 12 percent over the past 37 years. That would require a lower debt-to-income ratio among homebuyers and weighing expenses beyond debts, among other things.
Today, he says, FHA's market share is nearly 30%, compared with its historic level of 10%-15%.
The FHA has backed mortgages to borrowers making down payments of as little as 3.0%. Most private lenders wouldn't offer these borrowers loans without a government guarantee.
Pinto's concerns are shared with those of our own Shah Gilani.
In November last year, the Capital Wave Strategist warned, "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."
"It's just another example of our government kicking yet another can down the road," Shah said, "only, this is another turkey that isn't going to make it across the road."
Related Articles and Links
- Money Morning:
The FHA Is Just Another Thanksgiving Turkey Whose Time Has Come
- Money Morning:
FHA Bailout Looms
- The Wall Street Journal:
FHA Losses Could Hit $115 Billion in Extreme Scenario
FHA May Have Hidden Magnitude of Potential Losses, Lawmakers Say
Undisclosed stress test shows FHA could lose $115 billion