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.
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Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
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