Wednesday, October 7, 2009

FHA Needs U.S. Bailout for $54 Billion Shortfall, Pinto Says


Oct. 7 (Bloomberg) -- The Federal Housing Administration, the U.S. agency that insures mortgages with low down payments, faces $54 billion more in losses than it can withstand, a former Fannie Mae executive said.

“It appears destined for a taxpayer bailout in the next 24 to 36 months,” said Edward Pinto, a consultant who was chief credit officer from 1987 to 1989 for Fannie Mae, the mortgage- finance company that is now government-run, in testimony prepared for a House committee hearing in Washington tomorrow.

The FHA program’s volumes have quadrupled since 2006 as private lenders and insurers pulled back amid the U.S. housing slump, a trend Pinto said has left it backing risky loans and exposed to fraud in a “market where prices have yet to stabilize.” The program insures loans with down payments as low as 3.5 percent and has no formal credit-score requirements.

FHA Commissioner David H. Stevens, who will also speak tomorrow, said last month that falling prices would push its single-family fund’s reserves below a 2 percent cushion required by Congress. “Under no circumstances will a taxpayer bailout be needed” because the shortfall will be cured over time, he said.

Brian Sullivan, a spokesman for the Housing and Urban Development Department, which oversees the FHA, declined to comment today.

The idea the FHA needs a rescue is “just plain wrong,” Stevens said in an Oct. 6 letter to the Wall Street Journal. That’s in part because the FHA’s accounting method mean its reserves are enough to cover more than 30 years of projected losses, assuming no revenue from new business.

Total Reserves

FHA’s total reserves exceed $30 billion, or more than 4.4 percent of its insurance, according to Stevens. The loan- insurance ratio, which compares the reserves with the loans insured, was 6.4 percent a year ago, according to government data.

The agency said last month it would tighten some credit, appraisal and lender standards and appoint a chief risk officer. In the first half of the year, FHA insured more than $178 billion of new mortgages, or about 19 percent of the total, according to the newsletter Inside Mortgage Finance.

Official figures on FHA’s reserves as of Sept. 30 won’t show a shortfall when released because “the assumptions used will be overly optimistic relative to loss mitigation resulting from both loan modifications and recent and expected underwriting changes,” Pinto said.


  1. This political fallacy so well created and accepted by the American people that the programs where designed to create more home ownership for more Americans by reducing the lending standards and requirements has to go down as one of the greatest cons on the American public by politicians ever.
    Any one that understands the pathology of compound interest will agree with this statement by Charles Partee, former Federal Reserve Governor,"the power of compound interest is such a strong and fundamental force in redistributing incomes, you have to break the impact of compound interest rates every so often and write off the debts--if you don't want to crush the people." You see, it wasn't some humanitarian goal of our policies to help more people acquire houses but the desire to shift income upwards through the most powerful means, compound interest. All one has to do is view the Gini Coefficient to see how successful this shifting was. Why did they do this? Two reasons: First wages are sticky downward so there was not much income that could be shifted upwards as wages were being suppressed since wages move slowly in a contraction direction. Second, the creation of financial instruments that seemed to reduce the risk associated with writing mortgages to less qualified indivduals. Now we know what happens as we shifted too much income upwards and not allowed what Mr. Partee said should happen-- debt destruction. We are now protecting what should be losses from debt destruction by protecting the gains the wealthy made from this unprecedented shifting of income upwards. I have to hand it to the guys in charge for their ability to sell the numerous programs to protect this unheard of raping of the public both past and present.

  2. you pretty much nailed it, nohelp: not many people realize that the enticement of home ownership has been the vehicle to enslave the middle class, misdirect goal-seeking behavior into a controllable channel, and foster the belief that there is something status quo that we must defend and protect; on an individual basis, homeownership is an onus on freedom and personal growth...