October 10, 2009

Same Old Song and Dance: As Fan and Fred Losses Balloon, Here Comes the FHA


As if the Fannie Mae and Freddie Mac (Fan and Fred) crackups weren’t bad enough, IBDeditorials.com noted on Thursday evening that another bad-mortgage shoe is about to drop. This time it’s at the Federal Housing Authority (FHA).

First, let’s revisit Fan and Fred to remind readers just how complete the disaster has been at these decades in the making Democratic crony-controlled entities.

A little-noticed CNNMoney.com item by Chris Isidore in late July told us what the original announced loss estimate had been a year earlier (bolds are mine throughout this post):

When Congress was debating the bailout of Fannie and Freddie last July (of 2008), the official estimate from the Congressional Budget Office was that a bailout would most likely cost taxpayers $25 billion, with only a 5% chance of the price tag reaching $100 billion between them.

Isidiore then noted that just one year later the loss estimate had doubled:

…. Neither firm has given an estimate as to how high losses will reach. But the original limit of $100 billion in losses set in place when the government put Fannie and Freddie into conservatorship, essentially a form of bankruptcy, last September was quickly raised early this year to $200 billion each because of concerns about looming losses.

In return for pumping taxpayer dollars into the two firms, Treasury received preferred stock, which is designed to give the government a healthy 10% to 12% dividend. But few expect that Fannie or Freddie will be able to pay that dividend, let alone return the money handed to the firms to cover their losses.

Barely 45 days after Isidore’s item, John Ydstie at NPR noted that the supposed worst-case scenario had doubled yet again:

in its August update the CBO predicts the Treasury’s TARP program — which rescued banks, auto companies and homeowners — will lose more than $200 billion. It estimates the takeover of Fannie and Freddie could cost almost $400 billion.

That gets us back to IBD’s editorial on the FHA, a SO-SAD (Same Old Song And Dance) situation involving — you guessed it — even more lending to unqualified borrowers. What’s particularly galling is that FHA seems to have proactively and irresponsibly decided to be the conduit for bad loans once Fan and Fred stopped serving that purpose:

A huge, government-run housing agency shows massive losses and needs a bailout. Fannie Mae? Freddie Mac? No. It’s the Federal Housing Administration, in a bad case of financial-meltdown deja vu.

The FHA, which insures mortgages made by first-time buyers with low down payments, says it may need a bailout because it will have losses of — get this — $54 billion. And how did it lose all that? By backing home loans made to people who couldn’t pay them off.

Where have we heard this before?

At a time when we talk routinely of trillion dollar deficits, $54 billion may not seem like much. But it’s huge. Worse, it signals that the government, contrary to its repeated assertions of fiscal competence, is incapable of learning from its worst mistakes.

In the case of the FHA, as the Los Angeles Times notes, it doubled down on its bad bet. “This year alone,” the Times found, “the agency has backed nearly 2 million mortgages worth at least $328 billion.

Those who think that there are people inside our government who are bound and determined to take the economy down will consider adding FHA’s obviously deliberate move to take on new amounts of virtually guaranteed losses to their dossier.

Despite the LA Times work IBD refers to, the establishment media has been very slow to notice the deteriorating FHA situation. That has changed in the past 24-36 hours, which would appear to indicate that once again, an editorial in a conservative publication has shown the media where the story is. It should be the other way around.

Cross-posted at NewsBusters.org.


1 Comment

  1. Coming on the heels of the FHA debacle shortly to unfold, will be the implosion of the small banks exposed to commercial real estate loans.

    Already, the bank failures are placing enormous strain on the F.D.I.C. and its fund, which keeps depositors whole. Flush with more than $50 billion only two years ago, the fund recently fell into the red.

    The prospect of more failures has led the F.D.I.C. to seek new ways to replenish the fund with higher and earlier payments by healthy banks, even after setting aside reserves for future losses. ..

    …In fact, applying only the commercial real estate loss assumptions that federal regulators used during the stress tests for the big banks last spring, Foresight analysts estimated that as many as 581 small banks were at risk of collapse by 2011.

    By contrast, commercial real estate losses put none of the nation’s 19 biggest banks, and only about 5 of the next 100 largest lenders, in jeopardy…

    …Gerard Cassidy, a veteran banking analyst, said the problems call to mind the wave of small bank failures in Texas and New England two decades ago during the savings and loan crisis — only on a national scale.

    Back then, regulators closed more than 700 lenders in those regions. Today, Mr. Cassidy projects that as many as 1,000 small banks will close over the next few years and that their losses will be more severe. “It’s a repeat on steroids,” he said.


    You might call this a lucid moment from the NYT. The conclusion is there will be little money available in the form of loans to businesses, either small or large. When banks build up reserves to meet regulations, that’s money not available for loans, the same goes for higher FDIC fees. No investment capital means no expansion, orders for machinery or construction and that means no jobs.

    Comment by dscott — October 11, 2009 @ 3:36 pm

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