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Thread: The Next Big Bailout? FHA Facing "Cataclysmic" Default Rates

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    The Next Big Bailout? FHA Facing "Cataclysmic" Default Rates

    The Next Big Bailout? FHA Facing "Cataclysmic" Default Rates
    Posted Oct 13, 2009 09:00am EDT by Aaron Task

    Given the choice between "complete collapse" and increased government involvement in the housing market, Whitney Tilson, manager of T2 Partners, is glad policymakers opted for the latter in 2008.

    But there is going to be a heavy price to pay for the U.S. government becoming the nation's mortgage broker, says Tilson, co-author of More Mortgage Meltdown.

    Specifically, Tilson is worried about the potential need for a bailout of the Federal Housing Administration (FHA), which has guaranteed about 25% of all new U.S. mortgages written in 2009, up from just 2% in 2005.

    Created in 1934 to help low-income and first-time homeowners, the FHA has historically played a minor role in the U.S. housing market. But the agency has become the government's vehicle of choice for mortgage financing in the past year.

    Again, Tilson supports the concept of the government stepping into the breach caused by the near total cessation of private mortgage lending, as well as the curtailed financial activity of Fannie Mae and Freddie Mac, which became wards of the state in September 2008. But "there's a price to pay," he says, noting the FHA is facing "cataclysmic default rates" on loans written in 2006, 2007 and early 2008, as detailed by The NY Times.

    "Effectively we the taxpayers are now guaranteeing mortgages written by over 10,000 FHA-approved lenders," Tilson says. "The FHA's portfolio is exploding [and] the taxpayer is now on the hook for 100% of the losses."

    How big of a hook? The FHA's mortgage portfolio is now approaching $1 trillion. You can't assume all those mortgages will default but you can assume the FHA's exposure will only grow in the months ahead as politicians continue to look for ways to support the housing market (especially in an election year.)

    In other words, FHA is looking very much like the "new Fannie Mae."

    http://finance.yahoo.com/techticker/...ut-FHA-Facing-



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  3. #2
    Specifically, Tilson is worried about the potential need for a bailout of the Federal Housing Administration (FHA), which has guaranteed about 25% of all new U.S. mortgages written in 2009, up from just 2% in 2005.

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    Senators Introduce Legislation to Prevent FHA Bailout

    The new year may bring with it new reforms for the Federal Housing Administration (FHA) as Congress considers a bill designed to bring the agency back to fiscal solvency. It was revealed in November that FHA’s Mutual Mortgage Insurance (MMI) Fund—its protection against the cost of default claims—had fallen to a reserve ratio of -1.44 percent for fiscal year 2012. The agency is mandated by law to have a ratio of 2 percent. In response, Sen. Pat Toomey (R-Pennsylvania) has introduced an amendment to reduce the risk of what would be FHA’s first-ever taxpayer bailout.

    http://www.dsnews.com/articles/senta...out-2012-12-17



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