FHA Is SOL

The Daily Reckoning ^ | 11-13-2009 | Ian Mathias

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FHA Is SOL

By Ian Mathias

11/13/09 Baltimore, Maryland – Just as we forecast, the Federal Housing Administration revealed yesterday that it will likely need a government bailout. The results of an external audit (after being suddenly delayed for a week) showed the FHA’s capital cushion to be just 0.53% of its portfolio of insured mortgages. That’s way below the 2% mandated by Congress.

In other words, the FHA has just $3.6 billion in reserves to back up a $679 billion book. That’s into the Fannie Mae stratosphere of leverage insanity, worse than anyone expected, and way, way beyond the Wall Street risk taking our government has so publicly vilified.

Of course, a huge portion of these loans are easy-money, 3.5%-down mortgages designed to replace the subprime market and keep housing afloat during the last few years… and we’ve chronicled before their alarming rates of delinquency.
The FHA’s auditors said that under adverse housing conditions, the administration could be out of money by 2011 and require a $1.6 billion injection. We hasten to add last year’s audit forecast the FHA would have a $15.8 capital cushion today… only off the actual reserves by about fivefold.

But when the FHA comes to Capitol Hill with their tin cup, don’t call it a bailout. “There is no extraordinary action that Congress or anyone else needs to take,” said HUD Secretary Shaun Donovan. He’s right… long ago, Congress granted the FHA to borrow from the Treasury with relative impunity.

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[Eagles2003]

“showed the FHA’s capital cushion to be just 0.53% of its portfolio of insured mortgages.”

Would you place a bet with a football bookie with such a low cash cushion?