Best of the Week
Most Popular
1.Bitcoin War Begins – Bitcoin Cash Rises 50% While Bitcoin Drops $1,000 In 24 Hours - Jeff_Berwick
2.Fragile Stock Market Bull in a China Shop -James_Quinn
3.Sheffield Leafy Suburbs Tree Felling's Triggering House Prices CRASH! - Nadeem_Walayat
4.Bank of England Hikes UK Interest Rates 100%, Reversing BREXIT PANIC Cut! - Nadeem_Walayat
5.Government Finances and Gold - Cautionary Tale told in Four Charts - Michael_J_Kosares
6.Gold Stocks Winter Rally - Zeal_LLC
7.The Stock Market- From Here to Infinity? - Plunger
8.Ethereum (ETH/USD) – bullish breakout of large symmetrical triangle looks to be getting closer - MarketsToday
9.Electronic Gold: The Deep State’s Corrupt Threat to Human Prosperity and Freedom - Stewart_Dougherty
10.Finally, The Fall Of The House Of Saud - Jim_Willie_CB
Last 7 days
Santa Is Putting Christmas On The Blockchain And Saving Billions - 14th Dec 17
The Unprotected, the Protected, the Vulnerably Protected Classes—Which Are You? - 14th Dec 17
Gold’s Upside Target - 14th Dec 17
Year-end US Interest Rate Hike Again Proves To Be Launchpad For Gold Price - 14th Dec 17
2 Charts That Might Define the Fed’s Jerome Powell Era - 13th Dec 17
UK Stagflation Risk As Inflation Hits 3.1% and House Prices Fall - 13th Dec 17
Stock Market Elliott Wave Forecasts - Is the World coming to the end? - 13th Dec 17
A Method Traders Can Use to Confirm an Elliott Wave Count - 13th Dec 17
Best Time / Month of Year to BUY a USED Car is DECEMBER, UK Analysis - 13th Dec 17
A Former Wall Street Veteran: Good Traders Are Born, Not Trained - 12th Dec 17
Buy Gold, Silver Time After Speculators Reduce Longs and Banks Reduce Shorts to Continue? - 12th Dec 17
Masters of Economic and Political Illusion – in Taxes, Debt, Government, and Markets - 12th Dec 17
Approved Used Land Rover Main Dealer Real Customer Buying Guide - Hunters, Chester - 12th Dec 17
Gold Price 100% Bullish Signal - 12th Dec 17
Epic Stock Market & Fixed Income Bubble Will Not End Well - 12th Dec 17
Bitcoin can be stolen. Although Can’t be hacked - 11th Dec 17
Have Stocks Reached A Permanently Rigged Plateau? - 11th Dec 17
Trying To Beat The System Is A Fatally Flawed Investment Strategy - 11th Dec 17
Is This The Beginning Of The Next Silver Rush? - 11th Dec 17
The Dow Gold Ratio - 11th Dec 17
Evidence of a Stock Market Top Mounting - 10th Dec 17
Bitcoin Doesn’t Exist – Forks and Mad Max - 10th Dec 17
Bitcoin Doesn’t Exist – Putting the Banks Out of Business - 9th Dec 17
China’s Struggle for Market Economy Status - 9th Dec 17
Is Gold Really Strong? - 9th Dec 17
Bitcoin Parabolic Mania - 8th Dec 17
SPX Make a 61.8% Retracement - 8th Dec 17
Gold, Stocks and Bonds - The 3 Amigos Update - 8th Dec 17
Gold Stocks Break, Gold to Follow - 8th Dec 17
4 Charts That Show How Trump Tax Cuts Will Trigger A Recession - 8th Dec 17
Precious Metals Breaking Down! 3 Amigos to Abort? 4 Horsemen to Ride? - 7th Dec 17
Bitcoin Just Smashed Through $12k… Wait, $13k… Now $14k… This Is Getting Ridiculous! - 7th Dec 17
Stock Market Tops Look Like This - 7th Dec 17
Crude Oil, Oil Stocks and Invalidation of Breakouts - 7th Dec 17
Bitcoin Doesn’t Exist – 2 - 7th Dec 17

Market Oracle FREE Newsletter

Traders Workshop

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


© 2005-2018 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