Federal Housing Authority Poised to Re-Sink the Economy


This house just needs a bigger conforming loan limit.

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. 

Shaun Donovan feels your pain.

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. 

NEXT: Shame

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  1. It was all Wall street's fault!

    1. Totally!

      1. Moral hazard, how does it work?

      2. It was not the private sector's fault. It was your fault, if you want the government to fuck around with voluntary transactions. Your opinions are not regarded here.

        1. You make a mockery of voluntary. Mainly, it's whatever you want, which is pretty par for an aggressive agricultural city-Statist.

  2. I have been saying for years that if I ever get to meet a Congressman, I'm going to start to shake their hand and ask them "So I was wondering why you are against affordable housing? Is is just for the real estate lobbying money or are you actually just evil?"

    1. I would like to see that reaction on Youtube.

      1. If the opportunity ever arises, I'll do my best to have it on video.

    2. You might be better off if you just kept getting more and more enthusiastic about the "shaking" part. You know, it's so nice to meet you and I just want to really get a better grip here because who knows if I'll ever get a chance like this again.

      And you keep shaking until you've found the resonant frequency of this particular congress-creature. And you drive it to resonance and it suddenly explodes and is gone from the earth. Only it has to happen really fast so nobody gets the idea of stopping you, they just wonder how the hell a congress-creature was suddenly driven to resonance.

      And then you smile, and go on to meet your next congress creature.

      If you did this every day for a year, we'd all be much better off. Eventually there won't be enough of them left to pass bills and we might actually cut spending.

      Sure I'd love to see it on youtube, but that's entirely optional.

      1. My original thought was to pull them close and yell it into their ear, but then I decided that the consequences of such an action wouldn't be worth it.

    3. If the Congresscritter replies,"Never attribute to malice what can be adequately be explained by stupidity." when asked that question, I'll donate to his/her re-election fund.

  3. We talked about this in the Schiff post earlier, but a big reason the housing market is currently still breathing at all is the low interest rates available in home mortgages. But this can't last. Interest rates have to go up eventually or we become Argentina.

    Now for the bad news- something around half of all current US mortgages are ARM's, and of those the delinquency rates are record setting almost every quarter. When those rates "adjust" upward the foreclosure mess we are in now will be nothing in comparison to what's to come.

    It scares me but Schiff is right, it looks like it's going to get MUCH worse before it gets better.

    Oh well, time for beer.

    1. The funny thing is, for people my age (like the OWS people) the housing market collapsing further is a good thing. I don't really think of it as collapsing or getting worse but rather going back to market rates. When the value of something is highly inflated and it returns to normal that isn't "bad" necessarily. If housing is cheaper then it is easier for us to enter the market or at least make rent more affordable.

  4. Mises and the libertards never have figured that one out. They have to deliberately evade the truth.

    "Agriculture creates government." ~Richard Manning, Against the Grain, p.73

    1. Because without it, we'd all have to screw ourselves?

      1. Naah. We'd all have to eat rocks and vermin shut for dinner.

  5. bureaucrats just can't help themselves, always convinced that the next great step they take will be the right one. Sometimes, you just let life happen.

  6. wait, what?
    You take stuff LPS says seriously? LPS is getting sued all over the place for forging records and generally abusive practices.
    Just the other day a former LPS employee turned whistleblower was found dead in her home after missing her own sentencing hearing...

    1. Uh, Mike, did you have a point in that rant?
      And your brain-dead innuendo didn't help if you did.

    2. OK

      They're rotters.

      Now please provide information (and cite sources) that contradicts what they said. If the delinquency, foreclosure inventories and time taken to complete a foreclosure are not what they say, let us know what the true data is.

      If the data is what they say it is, impugning the source doesn't change it.

  7. Three words:

    Real Estate Contract.

  8. "LPS notes that lenders are still doing their best to drag out the foreclosure process".

    There have been some new laws recently in relation to the robo-signing that are gumming up the process...

    Slightly more than 600 default notices were filed against homeowners through Oct. 25 in the state's two most-populous counties, Las Vegas's Clark County and Reno's Washoe County. That was down from 5,360 in September, or an 88% drop, according to data tracked by ForeclosureRadar.com, a real-estate website that tracks such filings. Default notices represent the first step in processing foreclosures.

    Nevada's state Assembly passed a measure that took effect on Oct. 1 designed to crack down on "robo-signing."


    So, they were filing default notices on 5,360 homes a month in September, but because of the new robo-signing law, now they can only file default notices on 600 a month.

    This in Las Vegas, where the housing boom was at its worst--and the economy is still worse than any other major metropolitan area in the country.

    "Housing won't lead us out of the recession until the market hits rock bottom."

    That's exactly right. And this new anti-robo signing law in Las Vegas is expected to make it go from taking about 300 odd days to foreclose? To making it take 900 odd days to foreclose.

    This robo-signing issue is an area where a little effort on the part of the government might have been helpful. Why's the government always gotta stick its nose where it both doesn't belong--and doesn't do any damn good? If they gotta stick their nose somewhere, why can't it be doing something that might actually be helpful every once in a while?

    And making the foreclosure process speedy and uniform really might have been helpful.

    Letting a borrower stay in a home he's not making payments on because of robo-signing is in some ways like letting a murderer off on a technicality--except we're all paying the price.

    1. Sorry, Ken. Can't agree.

      Robosigning was all too often a fraud: what was being signed was, in effect, a sworn affidavit that a real officer of the lender had really reviewed the file, and was prepared to swear that (a) his company owned the loan (often not true), (b) his company had the right to foreclose (see (a) above), (c) the borrower had defaulted (occasionally not true), and that the foreclosure was kosher (on account of the bankers all being Jews, I think).

      Those are not small things. Perjury that results in someone losing their house is a pretty big deal, in my book.

      1. Ken's desire for "sped-up" foreclosure ultimately requires a robo-court system. Basically technocrats.

        Most of us would benefit from foreclosures getting processed faster, but there's a huge difference between the snail's pace of before and the speed-of-light pace of robo-signing.

        The idea that banks would voluntarily choose to absorb their loan losses doesn't pass the smell test - all they'd need is one or two percent of the transactions to be "honest fraud" and ask FedGov for forgiveness and a 2 fine and they can book a lot of revenue against the rest of the losses. It's been happening in other areas - the SEC fined JPM a couple months ago a whooping 5 billion... on a 20 billion scam. So FedGov let them keep 15 billion in fraud. Moral hazard on steroids.

        1. Meant "The idea that banks would voluntarily choose to absorb their loan losses FASTER..."

  9. dude, FHA is still offering to guarantee loans with only 3.5% down:


    the loan can even be used to cover closing costs, and they allow 3rd parties to pay the 3.5% down. so its entirely possible to "own" a home with literally no equity in it. and they still allow interest-only loans and 5yr ARM's (HUD's site even has a helpful "learn about interest only loans" link).

    even if you did put down 3.5% you'll be underwater within a year -- we have another 20%+ down leg to go before house prices revert to the historical norm, and that's assuming we don't overshoot because 80M baby boomers are selling into a poorer 60M GenX.

    pure insanity.

  10. > Presuming a 20 percent down payment

    If you have 20% down, you typically aren't going to get an FHA loan. If you do, it isn't likely to cost the insurance fund much if it forecloses (unless there is fraud). Suckers getting FHA loans when they have 20% down is pure win for FHA solvency.

    > That emergency increase expired October 1, and the high-cost conforming loan limit dropped back to $625,500.

    Pish. Not long ago (early 2008), the max for FHA was $362,790, and most places capped out at $200,160.

  11. My question is: What is the reasoning behind, or justification for, the federal government having any involvement at all in the housing market? Isn't that the real problem?

  12. "The average days delinquent for loans in foreclosure extended as well, setting a new record of 631 days since last payment... "

    No mortgage payment. No rent. That frees a lot of spending money for private stimulus programs. Hey. That clever Obama is harnessing the free market! And I thought he was a socialist.

    1. Harnessing? Maybe he is a socialist after all.

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