Archive for the ‘mortgage’ tag
FHA is the New Fannie
So it looks like the FHA, which guarantees lots and lots of home loans, is well on its way to needing a huge, Fannie-style bailout. From the WSJ:
…Federal Housing Administration, the nation’s insurer of nearly $750 billion in outstanding mortgages. The agency acknowledged this month that a new but still undisclosed HUD audit has found that FHA’s cash reserve fund is rapidly depleting and may drop below its Congressionally mandated 2% of insurance liabilities by the end of the year.
At a 50 to 1 leverage ratio, the FHA will soon have a smaller capital cushion than did investment bank Bear Stearns on the eve of its crash.
The basic problem is that the FHA guarantees every dollar of a loan, leaving neither the borrower nor the originator at risk in case of a default. Combine that with incredibly low down payment requirements for these loans and it’s a(nother) disaster waiting to happen.
One simple fix would be for the FHA guarantee to cover only 90% of the loan, in which case the lender would still have to care about the creditworthiness and default likelihood of the borrower, rather than dishing it all off to the taxpayers.
