Friday, November 18, 2011

With a 50/50 Chance That the FHA Will Need a Bailout Congress Decides to Lift Loan Limit to $729,750

The world is run by crazy people.
And housing industry lobbyists.
Just three days ago this was the story at PBS' NewsHour:

FHA Needs a Bail Out
TOM HUDSON: As we reported earlier, the "Occupy Wall Street" protestors have been kicked out of their Wall Street park. Among the complaints of protestors has been what they call Wall Street bailouts. Another bailout may be coming, but not for Wall Street. An independent audit shows the Federal Housing Administration could run out of money in the next year. Its reserve funds are far below what's required, prompting analysts to predict a bailout could be around the corner. Darren Gersh reports tonight on that possibility and a bill floating through Congress that could put even more pressure on the agency.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Federal Housing Administration financed one out of every three mortgages last year. But the money backing FHA's huge role in the housing market is steadily falling. A new report by independent auditors finds FHA holds just $2.6 billion in excess reserves. The law requires FHA reserves to be at least eight times higher.
JOE GYOURKO, PROF., REAL ESTATE, WHARTON SCHOOL: Over half of their portfolio is underwater, by my estimation and that leads to large expected losses down the road. And I think, for various reasons, they're under estimating losses by at least $50 billion
GERSH: FHA's acting administrator says it would take a very significant decline in home prices next year to force the agency to ask for a Treasury bailout. But critics say FHA is under estimating the risk by at least $50 billion.
GYOURKO: We should recapitalize the FHA and recognize that they are taking on very high risks and we need to pay for them and soundly finance that entity. And then number two, I think we need to develop a multi-year plan to ratchet back and to shrink their exposure in the housing market because they are so risky....MORE 
So yesterday, via the WSJ's Developments blog:
Lawmakers to Restore Higher FHA Loan Limits
U.S. lawmakers moved Thursday to increase the maximum size of loans that can be guaranteed by the Federal Housing Administration, even as a top Obama administration official expressed doubt about the need for the change.

A spending bill passed by Congress increases to $729,750 the maximum size of a mortgage that can be backed by the FHA, which guarantees loans to buyers with down payments as low as 3.5%. The Senate voted to approve the bill Thursday evening, after the House voted earlier in the day....
...“This means that taxpayers will be subsidizing the purchase of expensive homes by wealthy buyers,” said Sen. Richard Shelby (R., Ala.).

However, Sen. Robert Menendez (D., N.J.) said that restoring the loan limits will benefit the housing market at a time when it is weak. Doing so, he said, “won’t cost taxpayers a dime” and will benefit the housing market in many other parts of the country besides those cities....MORE