Best of the Week
Most Popular
1.Gold Price Trend Forecast, Where are the Gold Traders? - Bob_Loukas
2.Stocks Bear Market of 2017 Begins? Shorting the Dow At its Peak! - Nadeem_Walayat
3.Betting on President Trump Leaving Office Early, Presidency End Date - Betfair Market - Nadeem_Walayat
4.Why Stock Market Analysts Will be Wrong About 2017 - Clif_Droke
5.Is This The Best Way For Investors To Play The Electric Car Boom - OilPrice_Com
6.Silver Price 2017 Trend Forecast Update - Video - Nadeem_Walayat
7.Gold Price Set For Very Bullish 2017, Trend Forecast - Austin_Galt
8.10 Things I learned From Meetings With Trump’s Transition Team - - John_Mauldin
9.How Investors Can Profit From Trumps Military Ambitions - OilPrice_Com
10.Channel 4 War on 'Fake News', Forgets Own Alt Reality Propaganda Broadcasting - Nadeem_Walayat
Last 7 days
The Best Reasons to Buy Gold in the Age of Trump - 22nd Feb 17
Silver, The Return of Stagflation - 22nd Feb 17
Why EU BrExit Single Market Access Hard line is European Union Committing Suicide - 22nd Feb 17
Gold: Short End US Rates Matter More Than Long End Real Yields - 22nd Feb 17
CONTINENTAL RESOURCES: Example Of What Is Horribly Wrong With The U.S. Shale Oil Industry - 22nd Feb 17
Here’s Proof Rising Rates Are Good for Gold - 21st Feb 17
Gold and Silver Weekly Update - 21st Feb 17
US Dollar and Gold Battle of the Cycles - 21st Feb 17
NSA and CIA is the Enemy of the People - 21st Feb 17
Big Moves in the World Stock Markets - Big Bases - 21st Feb 17
Stock Market Uptrend Continues - 21st Feb 17
Brent Crude Oil Price Technical Update: Low Volatility Leads to High Volatility - 20th Feb 17
Trump’s Tax System Could Spark The Wave Of Self-Employment - 20th Feb 17
Here’s How to Stay Ahead of Machines and AI - 20th Feb 17
Warning Signs Of Instability In Russia - 20th Feb 17
Warning: This Energy Investment Could Wreak Havoc On Your Portfolio - 20th Feb 17
The Mother of All Financial Bubbles will be Unimaginably Destructive when it Bursts - 19th Feb 17
Gold’s Fundamentals Strengthen - 18th Feb 17
The Flynn Fiascom, the Trump Revolution Ends in a Whimper - 18th Feb 17
Not Nearly Enough Economic Growth To Keep Growing - 18th Feb 17
SPX Stocks Bull Market Continues to make New Highs - 18th Feb 17
China Disaster to Trigger Gold Run, Trump to Appoint 5 of 7 Fed Governors - 18th Feb 17
Gold Stock Volume Divergence - 17th Feb 17
Gold, Silver, US Dollar Cycles - 17th Feb 17
Inflation Spikes in 2017, Supporting Gold Prices Despite Increased Odds of March Rate Hike - 17th Feb 17
Roses Are Red... and So's Been EURUSD's Trend - 17th Feb 17
Gold Trade Note Sighted - 17th Feb 17
Gold Is Undervalued Say Leading Fund Managers - 17th Feb 17
NSA, CIA, FBI, Media Establishment 'Deep State' War Against Emerging 'Trump State' - 16th Feb 17
Silver, Gold Stocks and Remembering the Genius of Hunter S. Thompson - 16th Feb 17
Maps That Show The US’ Strategy In Asia-Pacific - 15th Feb 17
The Trump Stock Market Rally Is Just Getting Started! - 15th Feb 17
Tesco Crisis - Fake Prices, Brexit Inflation Tsunami to Send Food Prices Soaring 10% 2017 - 15th Feb 17
Stock Market Indexes Appear Ready to Roll Over - 15th Feb 17
Gold Bull Market? Or was 2016 Just a Gold Bug Mirage? - 15th Feb 17
Here’s How Germany Buys Time From China - 15th Feb 17
The Stock Trader’s Actionable Guide to Trump - 15th Feb 17
Trump A New Jacksonian Era? The Fourth Turning (2) - 14th Feb 17
Stock Market Yet Another Wall Street 'Witch's Brew' - 14th Feb 17
This Is Why You Don’t Own A Lot Of Stocks - 14th Feb 17
Proposed Tax Reforms Face Enormous Headwinds - 14th Feb 17

Market Oracle FREE Newsletter

State of Global Markets 2017 - Report

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


© 2005-2016 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