Meet The New Subprime: It Will Cost Us Billions

Forbes – When will our government come to realize that not everyone in this country can own a home? Not an issue of cruelty or insensitivity or lack of dream for Utopia, but a simple matter of economics. Not everyone has 20% or even 10% to make a bona fide down payment and have the subsequent income to comfortably service the debt. Apparently the continuing pain of the subprime crisis has taught our feckless politicians nothing. While sub-prime has morphed into a naughty word, a near clone has stealthily infiltrated the mortgage markets, choking the breath out of many unfortunates ensnared by its enervating tentacles. Meet the Federal Housing Administration or FHA. It found life under Roosevelt in 1934 as part of his alphabet soup answer to extricate America from depression. It started as a benign institution, and like today, insured loans and offered some down payment relief to borrowers.

Why Has FHA Become A Monster Now

Last November the Department of Housing and Urban Development (HUD) under whose purview FHA falls, issued the September 30 fiscal year 2011 annual report. It was a rather damning indictment. Capital which is statutorily set at 2% of assets had fallen to a measly .24% or from $4.7 billion in 2010 to $2.6 billion in year end 2011. It is only a mere $20 billion shy of requirement. This capital is expressed as the MMI or Mutual Mortgage Insurance Fund or the backstop to any defaults on the $1.1 trillion of FHA insured loans outstanding. The auditors estimated $26 billion of losses for loans underwritten through the first quarter of 2009 and another $14.1 billion for “seller funded down payment assistance loans”. Though since curtailed, the seller used to be able to loan the purchaser most or all of the down payment leaving the buyer with little or no “skin in the game.” Then the auditors sang the praises of the 2010 and 2011 books of business will be profitable, and there are new risk guidelines and credit policies in place and all is well and they expect to be in capital compliance by 2015.

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