Et Tu, FHA?

Hemorrhaging at FHA

FHA runs low on cash, fueling bailout concerns.

--Headline, The Boston Globe (11/13/09)

Here we go again.

First come the rumors of funny accounting and huge, buried losses.

Then come the vehement denials from company executives.

Finally, the truth comes out: the critics are vindicated, the losses are toted up, the discredited executives are booted (or not) . . . and the government provides a multi-billion dollar bailout.

Are we talking about Fannie Mae? Freddie Mac?

Well, yes. But this time, the embattled government agency is FHA.

Background

As you may or may not know, Fannie Mae and Freddie Mac -- the two biggest government-sponsored players in the housing market -- finally hit the (accounting) wall and were taken over by the government more than a year ago.

Both ultimately required tens of billions in government bailout money -- money they denied needing practically up until the end. In fact, they are still in business, still incurring losses, and still in need of more bailout money.

As Fannie Mae and Freddie Mac lending slowed down, much of the slack the last year has been taken up by FHA.

In fact, something like 30% of all mortgages made in the U.S. in the last year were backed by FHA.

Its appeal? Government insurance, plus low, 3.5% down payments.

No Margin for Error

Unfortunately, lending into a declining housing market to Buyers putting down a very slim down payment is a recipe for disaster.

In fact, my first-grader could do the math: 3.5% down, minus the drop in the local housing market (call it 5% to 20%), equals the amount FHA borrowers are underwater.

Throw in millions of recession-induced job losses, and the picture suddenly isn't very pretty.

Even if things aren't quite so dire, after Fannie Mae and Freddie Mac, I doubt that many people are going to give FHA executives the benefit of the doubt.