Get ready for $40 billion FHA bailout by 2012

posted at 10:12 am on October 9, 2009 by Ed Morrissey
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Perhaps even sooner, according to Edward Pinto, who helmed Fannie Mae in the late 1980s.  Pinto told Congress that their action in expanding availability of FHA loans, which has already led to a sharp increase in defaults, would force taxpayers to provide a massive bailout of FHA just as similar actions did with Fannie Mae and Freddie Mac:

A former Fannie Mae executive warned a House panel Thursday that the Federal Housing Administration is destined for a multibillion-dollar taxpayer bailout in 24 to 36 months, an analysis that the agency’s top official immediately dismissed as “completely unfounded.”

At a hearing before a House Financial Services panel, Edward J. Pinto predicted that the FHA will suffer $40 billion in losses, leaving it unable to cover its bad loans without taxpayer help. Pinto, a real estate finance consultant who served as Fannie Mae’s chief credit officer from 1987 to 1989, said he testified so lawmakers would “not be able to say that no one told them of the magnitude of the impending losses.” …

In his testimony, Pinto called the audit’s underlying assumptions “overly optimistic.” The FHA’s escalating default rate, its rapidly eroding reserves, and a recent dramatic increase in the amount of money people can borrow on FHA loans will have disastrous consequences, he warned the panel. FHA loans are especially vulnerable because they require only a 3.5 percent down payment — well below the 10 to 20 percent private lenders demand.

Pinto compared the FHA loans with Fannie Mae’s book of loans in 2006, which he said have similar characteristics, and he applied the default rate on the Fannie loans to the FHA mortgages. By that measure, the FHA was short $40 billion on its main financing account as of Sept. 30, in effect stripping the reserve account of its required funding and leaving it $14 billion in the hole, he said. The FHA, based on its history, will not be able to modify enough loans to thwart the losses.

Pinto suggested that the FHA raise its down payment requirement to 10 percent, reduce the cap on how much money FHA borrowers can borrow, and require FHA-approved lenders to co-insure the loans.

Pinto notes what many of us said when both the Bush and Obama administrations used FHA as a replacement for Fannie Mae and Freddie Mac after their collapses.  Treasury wanted FHA to step up its lending and lowered requirements to accomplish the task.  That was exactly what led to the collapses of Fannie and Freddie in the first place.

Now we have a new crisis on our hands from our failure to learn the correct lesson from the present one.  The government attempted to manipulate the housing market for political purposes instead of letting the market find a rational bottom at the end of the housing bubble.  The bailout of Fannie and Freddie will cost us $200 billion dollars already.  The FHA bailout comes as a moron tax, a 20% penalty for foolishly allowing the government to try the hair of the dog as a solution.

Of course, the FHA objects to this analysis.  They claim that all is well, despite their rising defaults and undercapitalization. The FHA wants to continue its social engineering, and so they get the Chip Diller Award for today:

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