Sunday, November 15, 2009

More FHA: Higher premiums coming and the need for humility

First from Bloomberg, It seems extremely likely the premiums FHA charges will be going up relatively soon:

Insurance premiums for mortgages guaranteed by the Federal Housing Administration may rise as the Obama administration looks for ways to shore up the agency’s finances, Housing and Urban Development Secretary Shaun Donovan said.
Increasing premiums is preferred because it rebuilds the capital base quicker. If they were looking at truly reducing their risk there would be underwriting changes like higher FICO's and higher down payments. Since those issues are political hot potatoes and the fact that premiums can be financed into the loan it is likely that we see the premiums increase before underwriting changes.

Secondly, The FHA needs to find some humility and realize that if they were a private business they would be on the verge of bankruptcy. Instead the FHA director David Stevens is giving speeches like this trumpeting the FHA (emphasis mine):
Federal Housing Administration Commissioner David Stevens said Saturday that concerns the agency is headed for the same financial trouble that snared Fannie Mae, Freddie Mac and the subprime sector are unwarranted.
But Stevens sought to dampen those concerns, noting that despite the most severe housing recession in decades, the agency has $31 billion in capital — $3.5 billion more than it had a year ago.
FHA is "the only participant in home financing services in the U.S. economy that hasn't needed a bailout, hasn't needed (funds from the government's Troubled Asset Relief Program), hasn't needed special assistance and is still completely self-sustaining," Stevens said.
"Without FHA there would be no (housing) market, and this economy's recovery would be significantly slower," he said.
About 17 percent of FHA borrowers are at least one payment behind or in foreclosure, compared with 13 percent for all loans, according to the Mortgage Bankers Association.
"That is why we're still standing while many of others did not survive this tumultuous time," he said.
FHA has more capital than last year but much less reserves a very important distinction. The capital is being set aside for expected losses and is only this high because the FHA is using new business to offset its previous losses it hadn't properly set aside capital for. Since FHA messed up so bad on its old book of business its only way of staying "self sustaining" would be to write new business with fewer losses (stricter underwriting) and they could increase their premiums.

Also hyperbole like "Without FHA there would be no (housing) market" is just stupid. There is always a market. It would be lower than it is now, but there is always a market. It reminds me of Mozilo back when Countrywide was unraveling making similar type of comments to justify the risky lending which ultimately doomed the firm. Fannie and Freddie were similarly arrogant before being placed in conservatorship. FHA will only survive this bust because of its backing by the US Government. It is that simple. It would be helpful if they learned some humility because in businesses with long lags between making decisions and then seeing the consequences of those decisions the bold words of management usually come off pretty stupid when looked at through the lens of history. Management needs to be worried about limiting the damage already done instead of going around tooting its own horn.

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