An FHA Bailout?

On November 15th the WSJ runs the story titled “FHA Nears Need for Taxpayer Funds”. Here we go again, another bank to bail out. The story
outlines serious financial problems facing the Federal Housing Administration (FHA) and it could exhaust its reserve. One of the problems cited for the reduced reserves is the rising mortgage  deliquencies. Interestingly enough, after the housing and lending meltdown of 2008, the FHA became the lender for the subprime borrowers. So with a lending program of 3% down and subprime borrowers, what could be wrong with this formula?

FHA has been the key element to the “housing recovery” our government has been trying to sell to us. After the collapse of 2008, Fannie Mae and Freddie Mac failed and FHA was left to pick up the pieces. FHA doesn't actually make loans but instead insures lenders against losses and has played a critical role helping the housing market by backing mortgages of borrowers that most private lenders won't originate without a government guarantee.  The FHA accounted for one third of loans used to purchase homes last year among owner occupants.

Though the FHA guarantees fewer mortgages than either Fannie or Freddie, it now has more seriously delinquent loans than either of the mortgage-finance giants. Overall, the FHA insured nearly 739,000 loans that were 90 days or more past due or in foreclosure at the end of September, an increase of more than 100,000 loans from a year ago. That represents about 9.6% of $1.08 trillion in mortgages guaranteed.

So you see why I am saying that the FHA Bailout is almost certain to happen. As the only player left, the FHA has simply been the sole source of mortgage provision to the subprime market.

Could this be Tim Geithner's last act as Treasury Secretary?

Mr. Geithner came in bailing out financial institutions and will go out the same way. He may be remembered as the Bailout King. If everything goes to plan. FHA problems will be swept under the carpet with no problems at all and this may happen before the end of this year. Hummmm, this may be the catastrophic event that people are waiting to happen on December 21!