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Sunday, February 10, 2013

Timiraos: "FHA Gets Scrutiny"

by Calculated Risk on 2/10/2013 06:29:00 PM

This is excellent article on the FHA from Nick Timiraos at the WSJ: FHA Gets Scrutiny as It Looks for a Hand

The Federal Housing Administration, a significant backer of new mortgage lending over the past five years, is facing billions of dollars in potential losses, as many loans that it guaranteed during the recession have soured. The agency's independent audit last fall showed that at its current pace, the FHA would exhaust its reserves and need $16 billion from the U.S. government to cover projected losses.

That would be a blow because since its creation in 1934, the agency has never required Treasury assistance. The FHA doesn't issue mortgages. Instead, it insures lenders against losses on loans that meet its standards. ...

... the FHA never relaxed its standards during the boom and didn't insure the toxic mortgages that inflated the housing bubble.

Before the bubble burst, lenders considered the FHA's standards too stringent, and in 2006 the agency's share of the home-purchase market fell below 5%. The FHA requires borrowers to prove they earn enough to make their monthly mortgage payment—thereby ruling out "liar loans." It backs mostly fixed-rate loans—meaning no teaser rates.
The most problematic loans are those insured from 2007-09, particularly from a program that allowed home sellers to make "gifts" of down payments to buyers through nonprofit groups. FHA officials belatedly prevailed on Congress to pull the plug on those risky lending programs in 2008.
The last two sentences refer to the owner financed "DAPs" or "downpayment assistance programs". I wrote extensively about DAPs during the bubble - were the owner "donated" the downpayment to the buyer through a third party "charity". The FHA tried to eliminate insuring those loans, the IRS called the programs a "scam", but Congress kept the program in place until 2008. Many of those loans went bad, significantly hurting the FHA's (and eventually taxpayers) finances. Of course the FHA also insured loans while house prices declined, and a large number of those loans defaulted too.

Some of my posts on DAPs: from 2006: Housing: IRS Raps DAPs, 2007: FHA to Ban DAPs and 2008: Ding-Dong! The DAP Is Dead. And from Tanta in 2007: DAP for UberNerds. Tanta concluded:
Supporting DAPs means supporting property sellers--particularly but not limited to builders and developers--and the "entrepreneurs" who form "nonprofits" to extract fees from naive homebuyers, not to mention loan originators who pocket higher commissions, with the risk being carried by government insurance. It is, precisely, the kind of sleazy, conflict-ridden, self-serving "initiative," overtly "faith-based" or its sort-of secular equivalent "dream-based," that thrives in an environment where regulation is dismantled or unenforced and "government" is bashed with one hand and milked with the other. It is an "innovation" just like plainer, older-fashioned forms of money-laundering are "innovations." It takes a profound ideological blindness to march behind the DAP banner in the name of "helping first time homebuyers."
And now we are seeing the consequences of that bad policy.  DAPs aren't the only reason the FHA is facing a shortfall, but they played a key role in damaging the FHA's finances.