Beware the FHA

The FHA Is the New Subprime [Kevin D. Williamson]

An interesting piece in the New York Times today:

The Federal Housing Administration said Thursday that its cash reserves had dwindled significantly in the last year as housing prices slumped and many of its borrowers defaulted on their mortgages.

Still, government housing officials stressed that the agency, which insures loans made by private lenders, would not need a direct bailout.

“Even if we were to go below zero, if the reserves were to become negative, there is no extraordinary action that Congress or anyone else needs to take,” the secretary of Housing and Urban Development, Shaun Donovan, said at a Washington press conference.

Setting aside the metaphysical question of whether a "reserve" with a negative number in front of it still is a reserve, the most interesting words here are "direct bailout." That leaves the door wide open for all sorts of other action.

Who could have seen this coming? Oh, yeah — I did, in May:

But really, who’s backing million-dollar mortgages any more? Oddly enough, the FHA – meaning taxpayers — is getting close. W. C. Varones, a San Diego–based investment manager who blogs at agoravox.com, reports that generous FHA down-payment terms mean that an investor could pick up a $700,000 house, finance $697,000 through the FHA for 5 percent on a 30-year mortgage, and only pay a 1.75 percent FHA fee in exchange. Paying 3.5 percent down under FHA terms, rather than 20 percent down through a conventional bank mortgage, “translates into a $12,000 fee and $300/month in exchange for keeping your extra $115,000 in cash,” he writes. “Plus, you can roll the fee and the points into the loan, so it’s not cash out of pocket.” His conclusion: “FHA is the new subprime. … And the sucker is not a sleazy outfit like Countrywide. It’s the FHA. That means you, the taxpayer.”

If there’s any doubt that the FHA is staggering in Fannie and Freddie’s footsteps into the subprime woods, take a look at their default rates: One in ten FHA-backed mortgages written in the first quarter of 2008 have gone bad already, with borrowers missing at least two consecutive monthly payments, the Wall Street Journal reports. Some 12.3 percent of the 2007 FHA loans were “seriously delinquent” by February of 2009, with 4 percent going to foreclosure or bankruptcy. It gets ugly when you drill down to particular FHA lenders. Strategic Mortgage of Columbus, Mo., has a 12.1 percent FHA default rate, and the president of the firm sounds like the Rev. Jeremiah Wright when he defends his practices, explaining to the Columbus Post -Dispatch that his competitors “made FHA loans to rich, white people in the suburbs; they’re not servicing the same communities I’m servicing.” One has to wonder what sort of community Great Country Mortgage Bankers of Florida was servicing: Their default rate hit nearly 70 percent before the FHA was embarrassed enough to shut them down.

And FHA has been bringing these eccentric business practices to an ever-larger market: With default rates rising, FHA’s loan volume has grown 400 percent since 2007, and its market share is now more than 30 percent. And FHA has expanded beyond housing; in April, the agency put together a three-quarters-of-a-billion-dollar deal to build a hospital in Trenton, N.J., the largest single transaction in FHA history. They’ve also gotten into the “reverse mortgage” business, writing loans against the value of elderly people’s houses and taking the property in lieu of payment after the borrowers die. The stimulus bill cleared the way for FHA to greatly expand its portfolio of reverse mortgages of up to $625,500 in most of the country, and even higher in Hawaii, Alaska, and the Virgin Islands.