Back in the innocent days of 2007 or so, it was customary for experts to say that housing had led the recession and housing would lead us out. Whatever measure of truth there may have been in that cliché, the reality is that by refusing to accept the real estate correction as the healthful and decades-overdue solution it is, America's leaders have created a new dynamic: Housing led us into the recession, and it continues to lead us into newer, deeper and more destructive recessions.
Last month Wharton School real estate finance professor Joseph Gyourko warned that the Federal Housing Authority is shaping up as the next likely target for a bailout. Although the full report [pdf] is worth reading, Gyourko's central argument is pretty simple:
(1) FHA has become a much larger and riskier government entity since the housing crisis began because it has increased its risk exposure without anything close to a commensurate scaling up of its capital base; (2) it is underestimating future default risk and losses on its single-family mortgage guarantee portfolio by at least $50 billion; and, (3) this should be corrected with an immediate recapitalization of FHA sufficient to compensate for the high risks it faces.
The FHA issued a rebuttal, noting that it had upped its assets by $400 million over the last year – a pittance, as Gyourko notes, compared to the $213 billion in new guarantees it issued over the same period.
We'll just have to wait and see whether HUD Secretary Shaun Donovan ends up lassoing taxpayers to shore up the insolvent FHA, but one thing is for sure: Everything has gotten worse, and FHA's policies have become even more reckless, since Gyourko's report.
In the middle of the month, the Obama Administration even managed to walk back one of the few things it has done right: allowing the expanded conforming loan limit for "high-cost areas" to lapse. At the start of the real estate correction FHA upped its conforming loan limit (the mortgage amount the federal government guarantees) to $729,750. That emergency increase expired October 1, and the high-cost conforming loan limit dropped back to $625,500.
But in a tribute to the lobbying power of Realtors®, the conforming loan limit got jacked back up a few weeks ago. The move makes negative sense. (Why do you need to increase the subsidy when house prices continue to fall?) It's also offensive to the broadly held belief that public assistance should be reserved for actual poor people: Presuming a 20 percent down payment, you're talking about a house in the high $900k range being subsidized by taxpayers. Who mourns for the million-dollar starter home? Apparently we all do.
It gets worse, however. In an email this morning, AEI Senior Fellow Edward Pinto, who has done crucial work on figuring out how the GSEs Fannie Mae and Freddie Mac defrauded taxpayers during the boom, reported on FHA's recent financial deterioration:
• In October 2011 17.02% of FHA loans were at some stage of delinquency.
– Comparing October to September, FHA's total delinquency (17.02% vs. 16.78%), 60-89 day (2.42% vs. 2.3%), and serious delinquency rates (9.05% vs. 8.77%) were all higher.
• The increase in the 60-89 day rate is a leading indicator of future claims problems.
– At 9.05%, the serious delinquency rate is now 0.8% higher than the 8.2% rate in June 2011 (Source: HUD Neighborhood Watch and FHA Outlook Reports).
• The June rate was used to prepare the recently released actuarial report.
– As a result, there were about 75,000 more seriously delinquent FHA loans in October compared to June.
• The Actuarial Study notes that FHA's forward single-family program has total capital resources of $28.2 billion offset by $27 billion in negative cash flows on its outstanding business (Study, p. 25).
– This sounds reassuring; however a private company would be required to set aside this amount plus $13 billion more to cover expected losses from known 60+ day delinquent loans:
• FHA is responsible for 100% of the losses on the loans it insures. As a result its loss severities are extremely high.
• In 2009 FHA experienced a 64% loss ratio (Study, p. E-2).
• In October FHA had over 836,000 loans 60+ days delinquent with an estimated total outstanding balance of $117 billion (October 2011 HUD Neighborhood Watch).
• FHA would incur losses of $41 billion if 55% of these loans eventually go to claim and losses average 64% (calculation based on private mortgage insurance company reserving practices).
• This is $1.5 billion more than a similar calculation made for September. 2011.
– FHA would need another $21 billion to meet its congressionally mandated 2% capital cushion.
Well maybe it's darkest before the dawn. Or darkest before things go completely black. Or something. In any event, Lender Processing Services reports that the percentage of mortgages in foreclosure is at its highest level ever. "Foreclosure inventories are on the rise," LPS writes, "reaching an all-time high at the end of October of 4.29 percent of all active mortgages." LPS notes that lenders are still doing their best to drag out the foreclosure process:
The average days delinquent for loans in foreclosure extended as well, setting a new record of 631 days since last payment, while the average days delinquent for loans 90 or more days past due but not yet in foreclosure decreased for the second consecutive month.
That second part may actually be a small piece of good news if it indicates lenders are at least getting serious about getting foreclosures started. Housing won't lead us out of the recession until the market hits rock bottom. Even Bob Shiller admits that we're a long way from there. But we will get there eventually. It's just a question of how long the feds want the torture to last.