Federal Housing Administration Reseves Almost Depleted
U.S. Government support to the housing market could claim another victim – The FHA. WSJ stories: Housing Agency Reserves Fall Far Below Minimum; The FHA’s Bailout Warning. The odds are U.S. government would have to step in once more because failing to react would add another leg to the housing downturn. We have witnessed that both the FED and U.S. government are willing to do “whatever it takes to avoid it”. My contribution to the theme would be only that you can row against the stream for limited time only.
Highlights:
The FHA largely avoided the subprime bust by requiring minimum down payments and documentation of incomes when many lenders didn’t. But the New Deal-era agency has seen its market share swell, to around one-quarter of the mortgage market today, up from 2% in 2006, according to Inside Mortgage Finance.
During the second quarter, the FHA backed nearly half of all mortgages made to first-time home buyers, and today it accounts for around half of all new home loans in some of the nation’s hardest-hit housing markets.
…
…Federal Housing Administration, which yesterday announced that its capital reserve ratio has fallen to 0.53%. That cushion is far below the 2% of its liabilities that Congress mandates, itself a 50 to 1 leverage ratio, and down from 3% last autumn. The FHA’s mortgage guarantees in 2009 are four times higher than they were in 2007. Nearly 18% of its loans are 30 days or more past due, while mortgages guaranteed in 2007 are “on par with FHA’s worst-ever books from the early 1980s,” according to the Department of Housing and Urban Development’s report to Congress. The financial deterioration is the result of the agency’s plunge into high-risk loans over the last two years, asking dangerously low down payments of 3.5% from unqualified borrowers.
Chart 1. FHA Mortgages Outstanding, Capital Ratio, Home Equity Ratios, Delinquencies
Source: Department of Housing and Urban Development, Federal Housing Administration, First American CoreLogic, Wall Street Journal