We’ve mentioned before that the FHA seems to have no idea how bad things are going to get for its portfolio of mortgage insurance and is adopting completely inadequate reforms to protect against looming disaster.
Of course, the FHA can never really go broke. Ultimately, the FHA is backed up by the full faith and credit of the United States government. Which means that we’re all on the hook for the FHA’s mistakes.
Today, David Rosenberg’s note touched on this and the potential implications:
We have a contact in the mortgage business who took a good hard look at the delinquency data from the FHA, along with loss severities. There is a very good chance that in the near future we will see the FHA insurance fund go negative. The implication is that the FHA will inevitably have to go to Congress for funding. When that happens Congress will have to tighten lending standards and increase down-payment requirements. Bear in mind that the FHA now represents about 40% of the mortgage market — with prospective of stricter FHA, home prices are going back down and fast. Just another reason to own high-quality bonds.
Another possibility, of course, is that the FHA won’t tighten. Indeed, the destruction of Fannie Mae and Freddie Mac did not lead to a humbler housing policy. They are now in the business of buying mortgage backed securities and have been given a blank check to do so. Arguably, a bailout of the FHA could result in the housing administration being all the more reckless since it will no longer face the constraints imposed by attempting to operate on a budget.
With the FHA playing such an important role in propping up the housing market, we doubt lawmakers would be too eager to reign it in.
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