Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
The Euro Is Bidding Its Time: A Reversal at Hand? - 23rd May 19
Gold Demand Rose 7% in Q1 2019. A Launching Pad Higher for Gold? - 23rd May 19
Global Economic Tensions Translate Into Oil Price Volatility - 22nd May 19
The Coming Pension Crisis Is So Big That It’s a Problem for Everyone - 22nd May 19
Crude Oil, Hot Stocks, and Currencies – Markets III - 22nd May 19
The No.1 Energy Stock for 2019 - 22nd May 19
Brexit Party and Lib-Dems Pull Further Away from Labour and Tories in Latest Opinion Polls - 22nd May 19
The Deep State vs Donald Trump - US vs Them Part 2 - 21st May 19
Deep State & Financial Powers Worry about Alternative Currencies - 21st May 19
Gold’s Exciting Boredom - 21st May 19
Trade War Fears Again, Will Stocks Resume the Downtrend? - 21st May 19
Buffett Mistake Costs Him $4.3 Billion This Year—Here’s What Every Investor Can Learn from It - 21st May 19
Dow Stock Market Trend Forecast 2019 May Update - Video - 20th May 19
A Brief History of Financial Entropy - 20th May 19
Gold, MMT, Fiat Money Inflation In France - 20th May 19
WAR - Us versus Them Narrative - 20th May 19
US - Iran War Safe-haven Reasons to Own Gold - 20th May 19
How long does Google have to reference a website? - 20th May 19
Tory Leadership Contest - Will Michael Gove Stab Boris Johnson in the Back Again? - 19th May 19
Stock Market Counter-trend Rally - 19th May 19
Will Stock Market “Sell in May, Go Away” Lead to a Correction… or a Crash? - 19th May 19
US vs. Global Stocks Sector Rotation – What Next? Part 1 - 19th May 19
BrExit Party EarthQuake Could Win it 150 MP's at Next UK General Election! - 18th May 19
Dow Stock Market Trend Forecast 2019 May Update - 18th May 19
US Economy to Die a Traditional Death… Inflation Is Going to Move Higher - 18th May 19
Trump’s Trade War Is Good for These 3 Dividend Stocks - 18th May 19
GDX Gold Mining Stocks Fundamentals Update - 17th May 19
Stock Markets Rally Hard – Is The Volatility Move Over? - 17th May 19
The Use of Technical Analysis for Forex Traders - 17th May 19
Brexit Party Set to Storm EU Parliament Elections - Seats Forecast - 17th May 19
Is the Trade War a Catalyst for Gold? - 17th May 19
This Is a Recession Indicator No One Is Talking About—and It’s Flashing Red - 17th May 19
War! Good or Bad for Stocks? - 17th May 19
How Many Seats Will Brexit Party Win - EU Parliament Elections Forecast 2019 - 16th May 19
It’s Not Technology but the Fed That Is Taking Away Jobs - 16th May 19
Learn to Protect your Forex Trading Capital - 16th May 19
Gold Ratio Charts Offer The Keys to the Bull Market - 16th May 19
Is Someone Secretly Smashing the Stock Market at Night? - 16th May 19

Market Oracle FREE Newsletter

U.S. House Prices Analysis and Trend Forecast 2019 to 2021

Federal Housing Administration Mortgage Market Ticking Time Bomb

Housing-Market / US Housing Jul 18, 2008 - 09:28 AM GMT

By: Money_Morning

Housing-Market Best Financial Markets Analysis ArticleShah Gilani writes: The fundamentals of economic strife based on the disastrous collapse of the U.S. housing market will not get better any time soon. In fact, what's being pushed through both houses of Congress, even as you read this, is so dangerous that it should be immediately abandoned and revealed for what it is - a ticking time bomb labeled with the initials FHA.

In the past few days alone, the Bernanke Bomb Squad - also known as the U.S. Federal Reserve - was able to defuse two ticking time bombs - Fannie Mae ( FNM ) and Freddie Mac ( FRE ) - before the full force of their explosive power could be felt. Fannie and Freddie are now being propped up and will eventually have to be taken over or put into receivership, meaning there ultimately will be damage to deal with .

So, why do I still hear a ticking sound? Because there's another bomb out there, and it's getting closer and closer to its point of ignition. Most folks aren't aware of it, and others who should know better are ignoring it.

The upshot: Most investors are completely oblivious to the danger it poses.

When FHA is Pronounced as "TNT"

This latest threat we're referring to, of course, is the Federal Housing Administration , more generally known as the FHA.

Congress believes that the FHA is the institution it can count on as the salve that covers the housing gash, and heals it - thereby delivering us from a New Millennium version of the Great Depression . But in reality, the FHA is not only an additional ticking time bomb - it's one that Congress is packing with additional gunpowder.

The Federal Housing Administration was created as part of the National Housing Act of 1934; in 1965 it became part of the Department of Housing and Urban Development (HUD). In a nutshell, FHA provides insurance - paid for by borrowers - that insures lenders, making certain that interest and principal will be paid on the mortgages that lenders grant to borrowers. FHA insurance and FHA-predicated loans facilitate home buying by low- to middle-income borrowers. When there were eager subprime-mortgage lenders and a plethora of similar lenders bending over backwards to provide mortgages (usually with teaser rates), FHA loans were not in the spotlight.

Legislative Shortfalls Certain to Surface

Within short order, perhaps as soon as next week, the Senate and House versions of their respective housing-recovery-legislation efforts will cross each other and be reconciled. In this politically charged election year, both U.S. political parties and both houses of Congress want to appear both proactive and decisive. The result will be a housing-relief package whose centerpieces are based on Fannie, Freddie and the FHA.

Because of the already-existing burdens of Freddie and Fannie, it's obvious that further encumbering them with loans from banks - or mortgage companies such as Countrywide Financial Corp. ( CFC ) - is flat out a bad idea. These are loans, after all, that no one else wants. Ultimately, Freddie and Fannie would take these newly acquired loans, would repackage them as securities, and would end up selling them to themselves, since no one else will buy them.

The centerpiece of the legislation provides $300 billion to the FHA to insure new mortgages for borrowers who are in danger of being foreclosed. This inane and stillborn idea is predicated on a reality
that just doesn't exist .

What will happen is that the legislation will shoehorn borrowers into mortgages that they have no real incentive to repay. In the end, when those dead-end mortgages are abandoned, we the taxpayers will pay to bail out the FHA.

Here's why the legislation won't work.

The Top Two Reasons Congress Can't Win

First, troubled borrowers will have to get lenders to forgive existing loans and take the write-off so that borrowers can refinance with an FHA loan. The trouble here is that lenders just can't unilaterally decide to forgive the loan. Most of these borrowers have second loans and equity credit lines - usually with more than one lender - and many of these lenders have no incentive to forgive the loans. After all, if the lenders forgive the indebtedness, what will they get?

Exactly nothing - nothing at all.

Another major impediment to this approach is that most of these loans were packaged into "trusts" that issued securities (collateralized mortgage bonds) based on the collective mortgages. The "servicers" of these trusts do not speak for the original lenders, and furthermore have absolutely no incentive to allow individual mortgage holders to opt-out.

If individual mortgage-holders opted out because they could refinance, that would shrink the size of the mortgage pool. Since trust-servicers are compensated based on total size of the pool, where's their incentive even if they could negotiate on behalf of the underlying lender?  Another idea that was tragically stillborn.

But it's the second problem that's the most worrisome. If borrowers could refinance based on the reduced appraised value of their homes (there's another issue right there: what appraisals?), they would have to agree to share any appreciation with the federal government.

I'm trying very hard not to laugh. Because it's really not funny. And here's why: Because all these folks need help and because the FHA requires down-payments of only 3%, those who can refinance actually might do so instead of just walking away - particularly since the FHA allows the down-payment to be borrowed, gifted or provided by charitable organizations. (Builders and developers can actually constitute themselves as charitable organizations, believe it or not).

So, banks will hold onto those loans that have decent recovery prospects. More than likely, anything valued at less than 80 cents on the dollar they have already written off - or will, soon - and will then dump those borrowers on the FHA. The FHA will end up with subprime and junk mortgages where the borrowers have "no skin in the game," and no upside incentive. And, as a last laugh, new legislation, already in place, allows the FHA to raise the amount of a loan they can insure from the previous level of $362,790 to a new total of $729,750.

(Special note to lawmakers: Hey folks, it was the extension of credit to borrowers who were unable to afford homes in the first place that got us into this mess).

The FHA is supposed to be revenue neutral, last year it lost $4.6 billion. Can you see where this is going?

The bottom line: This plan is not a panacea. It is a sea of pain - for the taxpayers, and for the housing market.

Market Notes From "Inside Wall Street:" Don't Get "Faked Out"

Don't be fooled by the "head-fake" rally. The truth is that the congressional efforts being pushed along at breakneck speed to "fix" the U.S. housing disaster are short-sighted and inept, and serve to hide the massive FHA time bomb that's destined to blow up in our collective face.

Color me unimpressed.

Wednesday's stock-market rally - and the follow-up advance yesterday (Thursday) - do not portend a sea change in momentum and no previous sell-offs would constitute a "capitulation" bottom.

To the contrary, it was what we professional traders call a
" dead cat bounce ." It was a technical rally based not on fundamentals, but on technicals. Shorts ran for cover, thanks chiefly to newly proposed Securities and Exchange Commission rules that would force short-sellers to actually "locate" shares of stock before they can sell that stock short.

There are massive shorts out there and from time to time such squeezes will result in "head-fake" rallies. The fundamentals have not changed. Keep your eyes on the prize.

[ Editor's Note : Contributing Editor R. Shah Gilani has toiled in the trading pits in Chicago, run trading desks in New York, operated as a broker/dealer and managed everything from hedge funds to currency accounts. In his new column, "Inside Wall Street," Gilani vows to take readers on a journey through the "shadowy back alleys" of the U.S. capital markets - and to conduct us past the "velvet rope" that guards Wall Street's most-valuable secrets - in an ongoing search for the investment ideas with the biggest profit potential.]

News and Related Story Links:

By Shah Gilani
Contributing Editor

Money Morning/The Money Map Report

©2008 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:

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 investment 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 72 hours 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

© 2005-2019 - 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

6 Critical Money Making Rules