Bush’s FHA Band-Aid

The Bush Administration, which resisted proposals to have Fannie Mae and Freddie Mac buy more mortgages to alleviate stress in the housing markets, is instead looking to the Federal Home Administration, which traditionally has provided insurance to low and middle income mortgages, to help troubled borrowers.

But if you believe the data in the Wall Street Journal story, this move is likely to prove inadequate. The Journal reports:

But many buyers who got subprime loans are beginning to have trouble making their mortgage payments as the attractive initial “teaser” interest rates are reset at much higher levels. While many of those buyers believed they could refinance their loans, that has become much harder as mortgage lenders tighten their standards in the face of defaults and foreclosures. The Center for Responsible Lending estimates as many as 2.2 million loans will reset over the next two years.

FHA says it is constrained from doing more now because of limits on the size of the loans it can back and some requirements that borrowers must meet. While its refinancing business has picked up and the agency expects to refinance about 120,000 loans this year, FHA officials say they could easily double that amount if given greater flexibility.

Do the math. As many as 2.2 million loans will reset over two years, so that’s 1.1 million a year. That doesn’t include borrowers who are already in trouble, or are stressed in the absence of a reset. As Dean Baker points out:

…..many of the subprimes were seriously delinquent or in foreclosure long before the mortgages reset to higher rates. In an analysis done early this year, the FDIC found that 10 percent of the subprime adjustable rate mortgages issued in 2006 were seriously delinquent (missed three or more payments) or in foreclosure within 10 months of issuance.

Since no mortgages had reset at the 10-month point, clearly there were other problems. Either borrowers could not afford even the low teaser rates or they were defaulting because they realized that their homes were worth less than their mortgages. The latter problem will only get worse as house prices continue to decline in response to the glut of housing on the market (the inventory of unsold new homes is 50 percent above the previous record and the number of vacant ownership units is almost twice the previous peak) and tightening credit conditions curtailing demand.

Now as we have discussed, the stats on delinquencies are notoriously unreliable (foreclosures are a different matter, but by then, things are past the point of no return). So we have to make guesstimates. One data point was a March report by CreditSights that estimated 500,000 homes could be coming on to the market due to subprime problems. Remember, those are the ones that hit the wall; there are more that are still in trouble. And conditions have deteriorated since March.

So let’s take that 500,000. Add to it a percentage of the 1.1 million borrowers assumed to undergo a reset this year (for the purposes of this exercise, per Baker’s point, we’ll assume the two populations don’t overlap, even though we know that isn’t really true. Nevertheless, the 1.1 million understates the total of borrowers at risk by a large but unknown margin), say 25%, who become seriously delinquent (that’s if anything low).

So if the FHA gets its authority to increase its scope, it could handle 240,000 mortgages a year, which by my very rough calculation is 31% of the mortgages at risk (anyone with a better methodology or data please speak up).

But remember, we are dealing with full year 2007 values when we are two-thirds of the way through the year. The number of borrowers under stress will tend to rise as weak homeowners keep trying various means to hang on to their homes. And other analyses show that more mortgages will reset in 2008 than 2007. So one would expect that the later the program is implemented, the greater the number of borrowers who will be in need, hence the lower the proportion that can be helped.

And even this proposal may well be cut back. Again, from the Journal:

But not everyone is convinced, and FHA reform may run into trouble in the Senate. Alabama Sen. Richard Shelby, the ranking Republican on the Senate Banking Committee, has expressed concern about expanding FHA, saying it could ultimately hurt taxpayers.

“One lesson learned from the current pattern of defaults and delinquencies in the subprime market is that those borrowers with little or no equity in their home will be the most likely to fail,” he said at a hearing last month. “We must approach any attempt to expand the program or lower the program’s standards with great caution.”

So much for compassionate conservatism.

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  1. Anonymous

    Well, you started with “the Bush administration” and ended with a snarky “so much for compassionate conservatism.”

    Is there anything I need to read in the middle? I get the Bush derangement syndrome stuff.

  2. Yves Smith

    Sorry to be having a run on Bush stories tonight, They are just much more in my face than usual.

    It may seem mean spirited to kick a lame duck, and in fairness, I can’t tell whether the FHA proposal is cynical or merely half hearted.

    The post is short, you might as well read it, particularly since I attempt to do a rough analysis in an area where the data is weak. I’d appreciate any better data on current and prospective delinquencies.

  3. HoosierDaddy

    The Southern Senators have always been against anything that would intefere with the free operation of the landowner/sharecropper relationship. The Senators changed parties over the last 30 years but the script has stayed the same.

  4. zcs_shoemaker

    Dear hoosierdaddy and everyone else,

    If you think we should bail everyone out that makes a risky decision then you need to become a true Christian and walk around in a white robe with no possessions. There is nothing fatter then a senators wallet, however, I like having some weight in mine.Plus, like the majority of others, we understand what adjustable rate means. It means if your stupid say “OK”!

  5. Anonymous

    I believe that just like any other gov’t program the FHAsecure plan will have the opposite of its intended effect. Subprimes were popular because the FHA was already too stringent and was already an underwriting nightmare. My main question is where has the Federal gov’t been for the past seven years while housing prices have doubled and priced many responsible people out of the home-owning market. My wife and I make over $100,000 a year and we can’t afford a home, so we’ve been forced to rent for the last seven years. We’ve been waiting and waiting for the market to correct and now that it is the gov’t wants to stop the cycle. I don’t get it. I really don’t. The gov’t just needs to back off, let the chips fall where they may, and let this thing run its course. I’ve read other posts that say it might take 5-10 years for prices to fall back to normalcy, which means that a house should only cost 4x what your annual income is. Right now, even cottages under the flight path of the airport in San Diego are selling for 800 k. It’s nuts.

  6. Cary

    This new FHA Secure program is a pretty package in a empty box.

    See most of these mortgages in 2002-2006 had been at a 100% LTV. With the FREE TRADE Program we have lost so many jobs, and people have lost so much income, homes have lost so much in value. AS our dallor shinks further.

    See the FHA Secure programs require a 90% Loan to Value. Today the loans the FHA program is trying to help are at 120-130% LTV. Due the declining value of the dollar and the falling value of our homes. See when my neighbor don’t work I don’t work!!!

    So FHA SEcure is no help, unless they reduce or wipe away the negative loan balance to match the 90% LTV.

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