Posted on 10/08/2009 5:34:26 PM PDT by Kaslin
Housing Mess: A huge, government-run housing agency shows massive losses and needs a bailout. Fannie Mae? Freddie Mac? No. It's the Federal Housing Administration, in a bad case of financial-meltdown deja vu.
The FHA, which insures mortgages made by first-time buyers with low down payments, says it may need a bailout because it will have losses of — get this — $54 billion. And how did it lose all that? By backing home loans made to people who couldn't pay them off.
Where have we heard this before?
At a time when we talk routinely of trillion dollar deficits, $54 billion may not seem like much. But it's huge. Worse, it signals that the government, contrary to its repeated assertions of fiscal competence, is incapable of learning from its worst mistakes.
In the case of the FHA, as the Los Angeles Times notes, it doubled down on its bad bet. "This year alone," the Times found, "the agency has backed nearly 2 million mortgages worth at least $328 billion. It insured 21.5% of all new mortgages last year, up from fewer than 6% in 2007."
Wasn't it only a year ago that we were told Fannie Mae and Freddie Mac were leaking money like sieves and would eventually need $400 billion in federal help? Now we're told the FHA might need the same kind of help.
(Excerpt) Read more at investors.com ...
Unfortunately, this article doesn't show how FHA got into this mess.
Which means that 21.5% of the new mortgages were made with the borrower having less than 20% down payment.
FHA may simply be seeing a default rate due to the general decline in the economy -- i.e. UNEMPLOYMENT.
“In the case of the FHA, as the Los Angeles Times notes, it doubled down on its bad bet. “This year alone,” the Times found, “the agency has backed nearly 2 million mortgages worth at least $328 billion. It insured 21.5% of all new mortgages last year, up from fewer than 6% in 2007.”
FHA Mortgages usually come with a monthly Insurance premium attached to it that is supposed to insure the loan against default, with the premiums being paid to FHA, and the beneficiary being the lender. My wife and I have both worked in Title Insurance, and a good rule of thumb guess for the amount of an average residential loan premium is about $100 per month, or about $1200 (or so) annually, depending upon the size of the loan, of course. On a new loan, FHA normally collects the first year’s premium (let us say $1200) at closing.
In theory, you only have to pay FHA premiums until you have sufficient equity in the home, but in fact you will have to refinance the loan again at a future date with new terms on the mortgage before you will ever get away from that $1200.
If FHA has covered 2 million loans this year, and collected about $1200 on each loan closed, then in theory they should have collected approximately $2400 Million Dollars (2.4 Billion). That money figures in to this somewhere....
Part of the problem is that those FHA premiums are NOT tax deductible like mortgage interest is, so some of these homeowners are jumping on a low interest rate on a desperation refinance, only to find themselves in a worse tax position because they just traded $1200 worth of tax deductions and are now handing it over to the FHA as a defacto tax increase, a double-whammy.
I think that’s part of what is driving the re-default rates on these loans along with the ever increasing unemployment rates.
The insurance premium only covers the amount of the loan in excess of 80% of the purchase price, correct? Premium can be calculated at .38% of loan amount. A $250,000 loan amount would add $760 a year to the payment.
Premiums can be eliminated when the principle balance on the original loan amount falls below 80%. On a 30 year amortized note, that would take about 16 years.
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