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Thread: With FDIC effectively broke, FHA now needs 54 Billion taxpayer bailout

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    Banned Melonie's Avatar
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    Default With FDIC effectively broke, FHA now needs 54 Billion taxpayer bailout

    while the aftermath of subprime housing delinquencies / bankruptcies has already caused enough bank failures to draw down the FDIC's insurance fund to near zero, nobody has bothered to mention that the FHA is also on the hook for subprime mortgage lending losses.



    (snip)"Oct. 8 (Bloomberg) -- 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, the mortgage-finance company that is now government-run.

    The FHA program’s volumes have quadrupled since 2006 as private lenders and insurers pulled back amid the U.S. housing slump, Pinto said. The jump has left the agency backing risky loans and exposed to fraud in a “market where prices have yet to stabilize,” he said.

    Representative Scott Garrett, a New Jersey Republican, introduced legislation this month to boost the FHA’s minimum down payment to 5 percent from 3.5 percent to help shore up the agency’s insurance fund, a move that could add to the housing market’s burdens as it struggles to recover.

    The market could also get less help from government aid programs that may lapse, including buyer tax credits and the Federal Reserve’s effort to cut loan rates by buying bonds. "(snip)


    OOOHHH ... the gov't is now going to start requiring a 5% down payment from new low income / minority / inner city subsidized subprime home mortgage borrowers ??? How about an income verification ? For that matter, how about a citizenship verification ?

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    Banned Melonie's Avatar
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    Default Re: With FDIC effectively broke, FHA now needs 54 Billion taxpayer bailout

    some professional commentary on FHA situation ,,,

    (snip)"Let's cut the crap here with the claims that the "FHA is making sound loans:"

    The idea the FHA needs a rescue is “just plain wrong,” Stevens said in an Oct. 6 letter to the Wall Street Journal. That’s in part because the FHA’s accounting method mean its reserves are enough to cover more than 30 years of projected losses, assuming no revenue from new business, he said.

    This is just plain pump-monkey nonsense.

    FHA currently requires 3.5% down. Remember that (contrary to the Realtard's assertions) all home purchases are instantly underwater by approximately 8% from their "purchase price" at closing, because typical Realtor commissions are 6% and closing costs, including title transfer, title insurance and doc stamps typically consume about 2% of the deal price. A home that must be immediately resold thus instantly "consumes" about 8% of the purchase price, and this deficiency persists over time, rising market or not.

    As such FHA loans are all immediately in negative equity at closing. If delinquency is running at 14% (which is 60 day+ only), or 22.9% (if you include 30 day lates) the fact remains that in order for the FHA to be "solvent" those problems must all occur after the loans go into positive equity status.

    Now one can argue that with conservative loan-to-value ratios the FHA won't lose its shirt. But even there the borrowers will unless the debt-to-income numbers are similarly conservative, and they are not, as I have previously documented. Indeed, in that particular loan I documented which did in fact fund the FHA was unlikely to take a loss (LTV under 70%) yet the borrower's debt to income was fifty-three percent - and that's on gross income, meaning pre-tax. The odds of that loan being sustainable and not resulting in the loss of the home for the borrower? Almost zero.

    So we have two problems here and yet the Realtor and FHA proponents don't want to talk about either. The first is that for FHA-funded purchases the 3.5% down payment results in a LTV of 96.5%, rendering the property and loan instantly upside down by roughly 5% at closing. Since the principal payments are near zero in all mortgages for the first few years a default in the first couple of years after origination will result in the FHA realizing an actual loss. If prices continue to decline those losses will, as a percentage of loan value, become ridiculously large in a huge hurry.

    In the second case, where refinances are taking place at reasonable LTVs (not the "streamline" refinances that are now authorized at up to 125%!) the FHA may not be exposed but the borrower sure is.

    The FHA's claim that it is practicing "conservative" underwriting is both a bad joke and a flat lie. Jeff Skilling went to prison for trying to run this sort of accounting at ENRON, yet we still have "government officials" doing the same thing at federal agencies.

    Back end "debt to income" ratios (DTIs) must be cut back to no higher than 36%, and CLTVs post-closing must be limited to 95%. For FHA loans this mandates a roughly 10% down payment, and refinances must be denied where post-closing, inclusive of all costs, the CLTV is over 90%.

    If the government wants to provide "rescue" financing for underwater (or "about to reset/recast") homeowners then they must force the original originating and/or securitizing bank to accept the writedown of principal to where these CLTVs are achieved - even if it bankrupts them."(snip)

    from

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    Default Re: With FDIC effectively broke, FHA now needs 54 Billion taxpayer bailout

    It is a certainty that the FHA will go bankrupt unless the Feds bail it out.

    The default rate on FHA loans is 76%.
    The FHA refuses to raise down payments.
    The FHA insures the riskiest mortgages.
    FHA reserves are dropping below the required 20%.
    2/3 of ALL sub-prime mortgages were with FHA, Fannie and Freddie.

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