As I noted in a recent post, a mini-bubble began this summer caused in part, by FHA loans. The pin is finally here.
According to the L.A. Times in just the past eight months, the FHA has added $328 billion in loans to its books. That is almost HALF of ALL the loans it now has on its books since it was created in 1934.
25% of loans in the U.S. are now being insured by the federal government you and me.
8% of these loans have failed, up from 5.5% in 2006.
The FHA is about to fall below its federally mandated loan loss reserve amounts. The U.S. taxpayer is on the hook again for the coming bailout.
The FHA has $1 trillion in loans on its books, and only $30 billion in reserves to cover any losses. If only 10% of these loans fail (remember, we’re at 8%), that is $100 billion in losses and they only have $30 billion to cover that. You do the math and while you’re at it, get out your checkbook, the government needs your help again.
Why is this happening?
Because house prices are STILL TOO HIGH…so most people can not qualify for a conventional mortgage with a conventional down payment. The government is not interested in letting the market correct itself, which keeps home prices artificially high. In their efforts to gain political points by preventing home prices from continuing to fall (the correction we really need), which also prevents banks from taking additional write downs that could potentially bankrupt them, our government continues to exclude responsible buyers from entering the market and supports the entry of irresponsible ones instead.
The government continues to meddle and muddle, trying to blow air back into the bubble. They’ve been using the FHA to continue lending to individuals who, most likely, should not be trying to buy a house. Sound like something we’ve already done before?
By using relaxed lending standards, as I explained in a prior post, and using a low down payment requirement, when a buyer is turned down by a bank, they turn to the FHA and they gladly rubber stamp the buyer’s application even though their ability to pay the mortgage is marginal, at best. The reason the FHA has taken on so many loans is because the banks, and wisely so, are NOT loaning to these people.
The FHA has become the new sub-prime lender by being the new lender of last resort. The only difference between the first bubble implosion and this one is that our government has cut out the middle man. Now they won’t have to use our tax money to bailout private banks struggling with foreclosures, they can just bailout one of their own government departments.
And to make it worse, the real estate industry, you remember…the ethically challenged trolls that brought us, “get in now or be priced out forever,” are now watching out for its own profits and are asking the government to allow the FHA to continue these reckless lending practices. Of course they are. They don’t care you and I get to pay the bill, just like last time.
The only savings you and I will get on this bailout is the postage stamp…on this bailout they can just walk the check down the hall from the IRS office to the FHA office instead of mailing it.
Categories: Housing Market