Best of the Week
Most Popular
1.UK House Prices Momentum Crash Threatens Mini Bear Market 2017 - Nadeem_Walayat
2.Perfect Storm - This Fourth Turning has Over a Decade of Continuous Storms to Come - James_Quinn
3.UK House Prices Momentum Crash Warns of 2017 Bear Market - Video - Nadeem_Walayat
4.Billionaire Investors Backing A Marijuana Boom In 2017 - OilPrice_Com
5.Emerging Markets & Basic Materials Stocks Breaking Out Together - Rambus_Chartology
6.Global Currency Reserve At Risk - Jim_Willie_CB
7.Gold and Silver: Your Stomach Is Probably Wrenching Right Now - The_Gold_Report
8.Warning: The Fed Is Preparing to Crash the Financial System Again - Graham_Summers
9.Basic Materials and Commodities Analysis and Trend Forecasts - Rambus_Chartology
10.Discover Why A Major American Revolution Is Brewing - Harry_Dent
Last 7 days
You Are Being Lied To About “Low” Gold Demand - 19th Aug 17
This is Why Cocoa's Crash Was a Perfect Setup - 19th Aug 17
Gold, Silver Consolidate On Last Weeks Gains, Palladium Surges 36% YTD To 16 Year High - 19th Aug 17
North Korea Is Far From Being Irrational… It Has A Plan - 18th Aug 17
US Civil War - FUNCTIONAL ILLITERATES TRYING TO ERASE HISTORY - 18th Aug 17
Bitcoin Hits New All-Time High Over $4,400 As It Catches Paypal In Total Market Cap - 17th Aug 17
3 Psychological Ingredients behind Great Web Content - 17th Aug 17
The War on Cash - Rogoff, Orwell and Kafka - 17th Aug 17
The Stock Market Guns of August, Trade Set-Up & Removing your Rose Tinted Glasses - 16th Aug 17
Stocks, Bonds, Interest Rates, and Serbia, Camp Kotok 2017 - 16th Aug 17
U.S. Stock Market: Sunrise ... Sunset - 16th Aug 17
The Next Tech Crash Could Delay Your Retirement by a Decade - 15th Aug 17
Gold and Silver Precious Metals Nearing Breakout - 15th Aug 17
North Korea Showdown: Pivotal Market Turning Point - 15th Aug 17
Tech Stocks DOT COM Bubble Do-Over? - 14th Aug 17
Deep State Conspiracy or Chaos - 14th Aug 17
From the Trans-Atlantic Axis and the Trans-Asian Axis - 14th Aug 17
Stock Market Intermediate Correction Underway - 14th Aug 17
The Islamic State Jihadi Pivot to Asia - 13th Aug 17
Potential Pivots Upcoming for Stocks and Gold - 13th Aug 17
North Korean Chinese Proxy vs US Military Empire Trending Towards Nuclear War! - 12th Aug 17
Gold Stocks Coiled Spring - 12th Aug 17
Neil Howe: The Amazon-Walmart Rivalry Will Determine the Future of Retail - 12th Aug 17
How to Alton Towers Half Price Discount Entry 2017 and 2018, Any Time, No Pre-Booking! - 12th Aug 17
Top 3 Technical Trading Tools Part 2: Relative Strength Index (RSI) - 11th Aug 17
What Makes Women Better Investors - 11th Aug 17
Crude Oil Price Precious Metals Link in August - 11th Aug 17
Influencer Marketing Predictions All Businesses Should Take Into Account - 11th Aug 17
Really Bad Ideas - Government Debt Isn’t Actually Debt - 10th Aug 17
Gold Sees Safe Haven Gains On Trump “Fire and Fury” Threat - 9th Aug 17
Why Is The Stock Market Not Trading On Fundamentals Lately? - 9th Aug 17
USD/CAD - Can We Trust This Breakout? - 9th Aug 17
New Monthly Rebate to Help Reduce Your Trading Costs - 9th Aug 17
Stock Market Divergences Are Now Appearing! - 9th Aug 17

Market Oracle FREE Newsletter

3 Videos + 8 Charts = Opportunities You Need to See - Free

Obama's Housing Market Refi Program Won't Work Because the FHA is Insolvent

Housing-Market / US Housing Feb 17, 2012 - 06:25 AM GMT

By: Money_Morning

Housing-Market

Best Financial Markets Analysis ArticleShah Gilani writes: In his State of the Union address last month, President Barack Obama outlined a plan to let homeowners, especially those underwater, refinance older mortgages to take advantage of today's low rates.

While serious political impediments stand in the way of the Obama refi plan, one reason it won't work is that it relies 100% on the Federal Housing Administration (FHA).


The problem is that the FHA is technically insolvent.

That "minor" issue could make the president's plan a non-starter.

The FHA doesn't originate mortgages. It is a government agency that insures 100% of the principal and interest on residential mortgages to the benefit of mortgage lenders.

The president's plan is to have the FHA insure all "eligible" borrowers' loans so lenders have a guarantee that refinanced mortgages will be paid back.

That incentivizes lenders to make loans they otherwise wouldn't make.

Why the FHA is Insolvent
Borrowers pay an upfront mortgage insurance premium (MIP) of 1% and modest monthly fees into the FHA's insurance fund. That's the FHA's only source of income and capital.

The fund has to maintain certain reserves and a cushion against the total obligations it has amassed based on the insurance it has in force, which currently exceeds $1 trillion.

The FHA is technically insolvent because it is already below the minimum 2% "economic value," or capital ratio it's required to maintain by law.

In fact, according to an American Enterprise Institute "Outlook" report, the FHA has only $1.2 billion in "economic value" supporting over $1 trillion on loan guarantees.

In other words the FHA's leverage ratio is close to 1,000 to 1 and its capital ratio is 0.12% -- nowhere close to 2%.

For some perspective on how far the FHA has slid in reverse, in 2006 its capital ratio was 7.38%.

Things aren't getting any better for the FHA either, they're getting worse.

Capital adequacy at the FHA is based on "projections" that are a moving target. The agency calculates its financial position on assumptions about current and projected delinquency and default rates, future premium payments and housing price trends.

Delinquency rates are currently rising faster than projected.

As of December 30, 2011, 12.1% of FHA-insured loans were 60 days or more past due, which is up from 10.55% on June 30, 2011.

And the American Enterprise Institute's Ed Pinto has been pointing to the alarming fact that 18% of all FHA-insured loans are now at least 30 days past due.

Another problem the FHA has is that its capital isn't just based on tangible assets.

It calculates future premium payments as part of its economic value. The American Enterprise's Outlook report equates this ledger domain to what Enron did when it was booking unearned income based on projections it fabricated into its earnings.

And, as if the FHA's current position isn't bad enough, its future financial health is predicated on its projections that U.S. housing prices will grow at a 4% annual rate well into the future.

Obama's Refi Plan: Massive New Guarantees
The FHA has a credit line with the Treasury Department and argues that it won't be a burden on taxpayers because future premium payments and an improving housing market ensure its solvency. And yet there's no accounting for the potentially massive increase in loan guarantees it would have to make under the president's refinancing program.

These refinanced loans will be made to borrowers who, while possibly lowering their monthly payments, will still owe more than their homes are worth.

Congress has to approve the president's refinancing plan along with the $61 billion "bank tax" he proposed to help pay for the plan and other homeowner assistance programs.

In a politically charged election year, it might be impossible to get backing for the president's refinancing program if taxpayers are made aware the program relies on an already-insolvent FHA further leveraging itself on an uncertain economic future.

Not only have Republicans denounced the president's proposed $61 billion "bank tax" as dead-on-arrival if it ever comes their way in either the House or the Senate (a proposal to raise half that amount in last year's budget failed), but general concerns about moral hazard and strategic defaults by borrowers whose loans are FHA guaranteed are sure to surface.

When borrowers with credit scores as low as 580 - who only have to put down 3.5% on an FHA-insured mortgage and can borrow up to $729,500 - end up piling on the government gravy train, at least we'll know how it might turn out.

Will we ever learn?

Source http://moneymorning.com/2012/02/17/...

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive


© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife