Is the Federal Housing Administration Next to be Bailed Out?

In testimony before a House committee in Washington yesterday, former chief credit officer for Fannie Mae said that the Federal Housing Administration (FHA) could need to be bailed out by the taxpayers sometime in the next 24 to 36 months, saying its has $54 billion over the amount of losses it can sustain.

The FHA primarily serves first time home buyers who can get a mortgage with a small down payment, as the agency insures mortgages to reduce the risk to lenders.

According to Pinto, the volume of the FHA program has surged at an incredible rate, having increased 4 times the amount it had just since 2006. That increase has resulted in highly risky loans being insured by the agency, with a strong exposure to potential fraud under the current market conditions.

It was somewhat telling how FHA Commissioner David H. Stevens responded to the assertions of Pinto, saying that the agency had no need of aid, and Pinto’s proclamation that the FHA need a rescue was wrong.

The reason I say it was telling, is Stevens spoke in the present tense, seeming to cover his rearend if the need for a bailout does come sometime in the next two to three years. Otherwise, why wouldn’t he say it in terms of the future as well?

Per Pinto’s testimony as reported by Bloomberg, he said he based his projections on “… FHA estimates on performance projections for high loan-to-value ratio loans insured by Fannie Mae in 2006, about 20 percent of which he expects to default costing 50 percent of balances.

“About 14.4 percent of FHA loans were delinquent as of June 30 and 2.98 percent were already being foreclosed upon, according to the Mortgage Bankers Association. The combined percentage for all mortgages was a record 13.16 percent, according to data from the Washington-based trade group, which said the share of FHA loans past due is being suppressed by the large amount of new debt.”

Some politicians tried to defend the solvency of the FHA, but the responses I’ve heard so far haven’t addressed the data presented by Pinto, but was rather more of a circling of the wagons and declarations of how much good the FHA has done; which makes me seriously think this is a major problem that really has a good chance of happening.

What’s important about the numbers Pinto shared, is he’s basically saying  new debt is making the past due share of FHA loans look much better than it really is, something that is a real problem in other government data presented just across the board, which is unreliable at best. The FDIC numbers are just one example of many other faulty government data. 

Pinto added that because of “the assumptions used will be overly optimistic relative to loss mitigation resulting from both loan modifications and recent and expected underwriting changes,” the data the FHA has officially released doesn’t show that in reality there is a shortfall at this time.

It sounds like the FHA are attempting to put off the inevitable realization by the public that they are also insolvent, and are also attempting to protect their territory and their jobs by making it look like their stated purpose of allegedly helping people makes the real numbers magically change to support their continued practices.

At least New Jersey Republican Scott Garrett isn’t in denial, and has introduced legislation to require a higher down payment of 5 percent for an FHA insured loan versus the current 3.5 percent down payment requirement, in an attempt to help shore up the insurance fund of the agency.