Tuesday, September 08, 2009

The FHA Meltdown!

Back in 2006 and 2007 I detailed the push by the Washington elites to “modernize” the FHA by lowering its standards effectively making it more “competitive” with the other major government and private institutions operating in the nation’s mortgage market.

Back then it appeared that FHA had become almost completely ineffective with loan insurance volume dropping over 95% in some areas in just the preceding five years.

But this drop-off was simply the result of the significant lowering of the lending standards of other public and private institutions and the sharp and artificial rise in home prices.

Stated plainly, FHA couldn’t compete because its statute simply prohibited its operation within such a distorted credit environment and inflated housing markets.

Rather than simply recognizing the obvious dangers in forcing FHA to compete in a market that was clearly undergoing a systemic meltdown the shameful Washington elites, prompted by the coming elections, self interested RPAC (Realtor Political Action Committee) initiatives, and just plain negligence, pushed forward with their efforts to “revitalize” FHA thereby “expanding American homeownership”.

As former senator Hillary Clinton explained in April of 2007, the proposed FHA modernization was a worthy cause “With the meltdown in the subprime housing market, it is clear that there needs to be a real alternative for more working families who want to achieve the dream of home ownership…”

So, the government continued to drive down standards while simultaneously pushing the populous theme of “homeownership for all” even directly in the face of epic levels of uncertainty and the obvious possibility that many new low standard loans would go almost directly into delinquency and foreclosure.

When, in January 2008, I protested legislative actions to increase of the “conforming loan limit” (affecting Fannie and Freddie as well as FHA) to as much as $730,000 Representative Barney Frank responded to my email with the following:

“With regard to the FHA, the Congressional Budget Office gives us a positive score with a comparable increase in the limit - that is they find that these loans will be repaid at an even higher rate than the other loans that fall below the old limit.”

Well, now comes news that FHA is in serious trouble as a result of significant levels of mortgage-related losses with 7.8% of their insured loans 90+ days delinquent or in default forcing its reserves to likely drop below 2% of the loans they insure, the minimum level mandated by Congress.

Some are suggesting a government bailout is on the way while HUD Secretary Shaun Donovan suggests that the chances are 50%-50%... either way this whole episode provides a nearly perfect example of how our government is simply disgraceful.