Thursday, October 08, 2009

FHA Bailout Seen

by Bill McBride on 10/08/2009 11:34:00 AM

From Bloomberg: FHA Shortfall Seen at $54 Billion May Lead to Bailout (ht Mike in Long Island, Ron at WallStreetPit)

The Federal Housing Administration, which insures mortgages with low down payments, may require a U.S. bailout because of $54 billion more in losses than it can withstand, a former Fannie Mae executive said.

“It appears destined for a taxpayer bailout in the next 24 to 36 months,” consultant Edward Pinto said in testimony prepared for a House committee hearing in Washington today. Pinto was the chief credit officer from 1987 to 1989 for Fannie Mae ...
Pinto makes several points, including:

  • "FHA is making much larger loans than in the past. Its top dollar limit is $729,500 versus its old top of $362,000 in 2008." This exposes the FHA more to high risk states like California.

  • "FHA allows up to a 6% seller concessions before requiring an appraisal adjustment." Pinto notes that Fannie Mae found that allowing concessions above 2% before adjustments led to much higher defaults.

  • High LTV lending is a higher percentage of loans today (23%) than in 2006 (17%). This is due to the large increase in FHA insured loans.

  • The first-time homebuyer tax credit is being used as a downpayment, and Pinto draws a comparison to the horrible default performance of the DAPs (downpayment assistance program) loans.

  • "FHA's early warning database indicates loan performance is deteriorating." See pages 6 and 7 of testimony for details. Note: I posted some data before, see FHA Lenders with High Default Rates

    There is more in his testimony.

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