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April 3rd, 2009

How Much Is the FHA Going to Cost Us?



We’ve learned entirely too much over the last few years or so not to be able to recognize the writing on the wall. As taxpayers, we’ve endured far too many bailouts to not get the sense that another one may be lurking just around the corner. That’s why it should come as no big surprise that our third story of the week featuring the escalating mortgage defaults at the Federal Housing Administration involves the discussion of yet another taxpayer bailout.

On Tuesday we blogged about the rise in “zero pay” defaults on FHA-insured loans. Yesterday we updated the story about how the government was sending “SWAT teams” unannounced to problem (FHA) lenders. Finally, on page three of this morning’s Wall Street Journal comes an article titled “FHA Losses Spur Talk Of a Taxpayer Bailout.”

The discussion surrounding the FHA’s current situation suggests that they have two options: either ask Congress for a bailout, or raise the premiums they charge their borrowers.

The latter choice seems like a no-brainer except for the fact that Congress voted against risked-based pricing last August. Thus, FHA lenders charge the same insurance premiums to their higher-risk borrowers as they do to their more financially-qualified borrowers. However, those riskier loans are likely the leading cause of growing losses to the FHA insurance pool.

From the WSJ:

Rising defaults are now eating through the FHA’s cushion of reserves. Roughly 7.5% of FHA loans were seriously delinquent at the end of February, up from 6.2% a year earlier. The FHA’s reserve fund fell to about 3% of its mortgage portfolio in the 2008 fiscal year, down from 6.4% in the previous year. By law, it must remain above 2%.

It won’t be a difficult task to prove to Congress why the FHA “needs” this bailout. The entire public mortgage market is down to prime lenders (like Fannie and Freddie) and the FHA — the original “below-prime” lender. Currently, the FHA is the only entity serving the public sub-prime market. Either you are eligible for a conforming loan, or you have little choice but to apply for an FHA loan.

Forget “too big to fail.” With an estimated 30% market share, FHA is too essential to fail. Now that we’ve prepared ourselves, here comes the next question: how much are the nation’s riskiest borrowers going to cost us this time?

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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