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Saturday, December 3, 2011

FHA Poised To Re-sink Housing Market

FHA Poised To Re-sink Housing Market

“FHA is underestimating future default risk and losses on its single-family mortgage guarantee portfolio by at least $50 billion”

By Dell Hill

I think I smell another massive federal government bailout coming up.

I’ve been writing about the housing market for over two years.  Including today, I haven’t written one word of good news that has come out of that God-forsaken industry and today isn’t looking too good, either.

Federal Housing Authority Poised to Re-Sink the Economy

Tim Cavanaugh at Reason TV has this heart-warming news.


Back in the innocent days of 2007 or so, it was customary for experts to say that housing had led the recession and housing would lead us out. Whatever measure of truth there may have been in that cliché, the reality is that by refusing to accept the real estate correction as the healthful and decades-overdue solution it is, America’s leaders have created a new dynamic: Housing led us into the recession, and it continues to lead us into newer, deeper and more destructive recessions.

Last month Wharton School real estate finance professor Joseph Gyourko warned that the Federal Housing Authority is shaping up as the next likely target for a bailout. Although the full report [pdf] is worth reading,
Gyourko’s central argument is pretty simple:

(1) FHA has become a much larger and riskier government entity since the housing crisis began because it has increased its risk exposure without anything close to a commensurate scaling up of its capital base;

(2) it is underestimating future default risk and losses on its single-family mortgage guarantee portfolio by at least $50 billion;  and,

(3) this should be corrected with an immediate recapitalization of FHA sufficient to compensate for the high risks it faces.

The FHA issued a rebuttal, noting that it had upped its assets by $400 million over the last year – a pittance, as Gyourko notes, compared to the $213 billion in new guarantees it issued over the same period.

We’ll just have to wait and see whether HUD Secretary Shaun Donovan ends up lassoing taxpayers to shore up the insolvent FHA, but one thing is for sure: Everything has gotten worse, and FHA’s policies have become even more reckless, since Gyourko’s report.

In the middle of the month, the Obama Administration even managed to walk back one of the few things it has done right: allowing the expanded conforming loan limit for “high-cost areas” to lapse. At the start of the real estate correction FHA upped its conforming loan limit (the mortgage amount the federal government guarantees) to $729,750. That emergency increase expired October 1, and the high-cost conforming loan limit dropped back to $625,500.

But in a tribute to the lobbying power of Realtors®, the conforming loan limit got jacked back up a few weeks ago. The move makes negative sense. (Why do you need to increase the subsidy when house prices continue to fall?) It’s also offensive to the broadly held belief that public assistance should be reserved for actual poor people: Presuming a 20 percent down payment, you’re talking about a house in the high $900k range being subsidized by taxpayers. Who mourns for the million-dollar starter home?  Apparently we all do.”

Read the entire piece by clicking right here.

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