October 10, 2009: Is FHA the New Fannie Mae?
Recently, the NY Times published one story about the continuing financial problems at Fannie Mae and Freddie Mac (losses of $165 billion since July 2007and counting), and another story on the growing financial problems at another mortgage giant—the Federal Housing Administration or FHA.
The FHA used to be a bit player in the mortgage market with less than 2% market share, until Fannie Mae and Freddie Mac were placed into conservatorship during 2008 and forced to tighten lending standards. No more would they buy or guarantee subprime mortgages to borrowers with low credit scores, poor or no documentation, and little or no down payment. Consequently, their combined market share of the mortgage market has dropped from 60% to less than 10% while FHA had jumped from 2% to more than 40%.
The reason for FHA’s growth has been its lax lending standards (3.5% down payment, low credit scores, sound familiar?) Now the FHA has reported that 20% of the loans it insured last year and 24% of the loans it insured in 2007 are delinquent or in foreclosure. Yet the FHA Commissioner has “assured” Congress that the agency will not need a bailout. (As I remember, the CEOs of Fannie and Freddie made similar assurances right up until those two agencies were put into conservatorship at a cost to the taxpayer of $80 billion.)
So, is FHA the next Fannie Mae, destined to cost the U.S. taxpayer tens of billion of dollars to cover its losses on insured mortgages? The answer to this question depends upon whether or not the housing market continues to crash and burn. As documented in yesterday’s blog, it appears that the housing market is continuing to deteriorate, making it highly probable that FHA will impose massive losses on us taxpayers.
