First Fannie and Freddie, Now the FHA?

Thirteen months ago, the government took over Fannie Mae and Freddie Mac, both on the verge of failure. What have we learned since then? Jack…

The Federal Housing Administration, “appears destined for a taxpayer bailout in the next 24-36 months,” Edward Pinto said at a congressional hearing yesterday. As the former chief credit officer for Fannie Mae, he should know.

But it doesn’t even take an industry insider to figure this one out. Just a year after bailing out the overleveraged Fannie and Freddie, the FHA has managed to paint itself into the exact same corner. When the free market — in its infinite ignorance — stopped issuing easy money home loans last year, the FHA stepped in and became a huge player in the mortgage loan biz. It went from insuring 6% of new mortgages in 2007 to over 21% last year, and even more in 2009.

Now the FHA insures 5.4 million single-family home mortgages — most of which require only 3.5% down payment — at a value of $675 billion. Their cash cushion? Oops, must have forgotten to beef that up too… it’s just $30 billion. That’s the same 20-1 leverage our government’s been pooh-poohing on Wall Street.

And since the FHA has become the insurer of last resort, famous for their crazy-low down payments, the loans they cover are souring at an accelerating pace. The more recent the loan, the worse it’s performing… can you hear the wind sucking out of this one?

FHA Default Rate

So what happens if the FHA goes belly up? Hey, don’t call us alarmists: “Let’s be clear,” said Congresswoman Maxine Waters at the hearing, “without the FHA, there would be no mortgage market right now.” As we’ve forecast before, look for the FHA to be the next multi-billion-dollar bailout.

“We remain concerned and recognize the risk associated with increasing numbers of seriously delinquent loans,” Federal Housing Finance Agency acting director Ed DeMarco testified yesterday in a separate congressional hearing. Not to be confused with the FHA, the FHFA is Fannie and Freddie’s post- receivership regulator. Heh, what… you thought throwing them $100 billion would fix everything?

DeMarco testified that Fannie and Freddie loans, like the FHA’s, are souring at rates “disturbing both in their magnitude and the fact that they continue to increase.” Despite already being beneficiaries of over $96 billion in bailout bucks, Fannie and Freddie will “likely require additional draws,” he said… the nicest possible way to admit both companies need billions more.