FHA Moving To Center Stage

A: "With private subprime lenders out of business, the FHA and Ginnie Mae are picking up the slack and very few are talking about it". Well, now they are talking about it. With gold nearing a thousand and Gartman on CNBC this morning discussing something lurking out there, maybe we have another problem with the FHA or Ginnie Mae to deal with.

Via WSJ, "Loan Losses Spark Concern Over FHA":

The Federal Housing Administration, hit by increasing mortgage-related losses, is in danger of seeing its reserves fall below the level demanded by Congress, according to government officials, in a development that could raise concerns about whether the agency needs a taxpayer bailout.

Some 7.8% of FHA loans at the end of the second quarter were 90 days late or more, or in foreclosure, according to the Mortgage Bankers Association, a figure roughly equal to the national average for all loans. That is up from 5.4% a year ago. If its reserves fall short, the agency is obliged to notify Congress, which could spark a commotion over the extent to which the government is funding losses in the housing market.

A senior official at HUD, which oversees the FHA, said there is "no risk" that the FHA would require money from Congress if the ratio falls below 2%.

Phew, well that's comforting, 'no risk' that FHA will need money - mark that down in your little notepad of famous quotes to join Countrywide, Fannie Mae, Freddie Mac, Washington Mutual, Bear Stearns, and Lehman.

Via CalculatedRisk, "FHA: The Next Bailout?":

"The FHA's aggressive lending programs have continued throughout the housing downturn, causing its market share of the mortgage industry to grow from 2% in 2005 to 23% today. ... The FHA insurance fund, however, is likely running dry. ...

While almost all of the experts believe that Congress would support the FHA if necessary (it's currently self-funded), we wonder if FHA officials will be under pressure to continue tightening their lending policies, which currently allow 96.5% mortgages to people with 600 FICO scores. ... Claims against the insurance fund have climbed, with roughly 7% of all FHA-insured loans now delinquent."

And from Rolfe over at Reuters:

The required reserve level is a paltry 2%. Readers may recall that was the capital level Fannie and Freddie were operating with just before they were taken into conservatorship. The ratio last year was around 3%, down from 6.4% in 2007.

No doubt the reserve ratio has fallen substantially since last year. The revised figure won’t be made available until FHA’s fiscal year ends Sept. 30th. FHA’s exploding volumes are just another indicator of the substantial government support propping up house prices.

With all that volume, one would hope FHA had a robust risk management apparatus. Nope. Over $600 billion of loans backed by the end of this year, but no chief risk officer….

A canary in the coal mine was the raid on Taylor Bean & Whitaker, a multi-billion dollar lender that had seen its FHA lending business expand very quickly over the past year. But TBW’s underwriting was terrible so FHA suspended them from issuing guaranteed loans. By the end, TBW’s business had grown to $100m-$150m worth of loans per day. The suspension put TBW out of business overnight.

You can always count on Rolfe to dig up some nice details. Why does the FHA have no chief risk officer? Is this really true?

People like to ignore stuff like this and choose to accept that the problem will resolve itself with time. What readers of this site should be concerned with, is that all you need is a perceived problem with the FHA and Ginnie Mae that could very well undo the dramatic improvement in credit that was engineered by our fed. Whether the problem ultimately leads to an event becomes secondary as the perception of confidence is all that matters to start the ball rolling - from then on it can easily gain steam and become another toned down version of a crisis of confidence. If that happens credit will widen and that could affect the financing operations of any levered business; especially one tied to insuring huge amounts of loans. Is the rise in gold tied to something lurking out there? Who knows, too conspiracy theory for me and if credit did start to act hairy we would see it. For now lets just focus on asking the right questions and always keeping an eye on credit for any notable widening.