We suspect this counts as Schadenfreude, but according to Edward Pinto, a former Fannie Mae executive, the Federal Housing Administration (FHA) may need a major cash infusion from the US government.
Consider, first of all, the FHA’s mandate: insure mortgages made with low down payments. Nothing risky about that, surely?
In any event, in testimony given to a subcommittee of the House Financial Services Committee at a hearing on Thursday, Pinto argued the FHA “appears to be destined for a taxpayer bailout in the next 24-36 months.”
As Pinto – who highlighted five reasons for his assertion, including the insurer’s allegedly “long history of fraud” – put it:
An insurer, even a government backed one, cannot lend on a high risk basis into markets and declining home values without excessively high rates of default along with soaring non-cure and re-default rates
According to Bloomberg, a spokesman for the Housing and Urban Development Department – which oversees the FHA, “declined to comment.”
No matter, because the FHA has commented on its precarious financial situation before. As the FT reported in September (emphasis ours):
The Federal Housing Administration, the US government mortgage-insurer, warned.. that its cash cushion would dip below the limit set by Congress as the savaged housing market puts increasing strain on the fund.
The FHA, which was created in the Great Depression of the 1930s and insures some 4.8m single-family mortgages, stressed that it would not need a taxpayer bailout and was taking steps to address the problem.
“To be clear, the fund’s reserves are sufficient to cover our future losses, so the FHA will not require taxpayer assistance or new Congressional action,” said David Stevens, FHA commissioner.
According to the FT reported, the FHA is taking steps to improve its capital position – like hiring its first-ever chief risk officer. Moreover, the FT said:
It also announced plans to tighten up on the lenders that offer FHA-insured loans. These include making the lenders file audited statements to the FHA and increasing the net worth requirement for approved lenders by around $1m. The current requirement is just $250,000 and has not been changed since 1993.
“These changes will help to ensure that FHA lenders are sufficiently capitalized to meet potential needs, thereby permitting HUD (the housing and urban development department) to mitigate losses and decrease risks to the FHA insurance fund,” the FHA said.
That decision would be subject to consultation and would not take effect for at least a year.
To review – some two years into a massive meltdown in the US housing and mortgage market, and more than 60 years after its inception, the FHA has finally hired a chief risk officer. It has proposed changes to ensure the lenders which issue FHA-insured loans don’t expose the organization to massive risk, but made these changes subject to consultation and has delayed their imposition for at least a year after the end of the discussion process.
And according to the testimony of FHA commissioner Stevens before the same committee on Thursday:
Let me simply state at the outset that based on current projections, absent any catastrophic home price decline, FHA will not need to ask Congress and the American taxpayer for extraordinary assistance – we will not need a bailout.
Absolutely nothing to worry about, then.
Related links:
Prime crisis – FT Alphaville
For FHLB’s sake – FT Alphaville
FHLBs, you shan’t go to the securitisation ball – FT Alphaville
Fannie, Freddie, now FHLBs? – FT Alphaville