FHA – About to get into our tax dollars?

Like that is a big surprise… I’ve been telling people that we would get there since the first quarter in 2007 when it was obvious that sub-prime was going to be out of the picture, and all that pressure started heading to FHA.   I’m actually baffled that it has not yet happened.

For those of you who don’t know, I used to work for an Equifax affiliate here in Macon.  My brother, who also worked for Equifax until 2001, used to have a cute speech he would give finance companies when managers would ask him credit questions about their customers. 

It went something like this:  “You know, we really, really appreciate your business, and I don’t want to say or do anything that would harm our relationship.  We want you to pull credit files!  But, really… If you are going to make loans to people like this, why even bother to look at their credit?  I mean, they obviously never paid anyone, so what made you think you were going to be so lucky?”

Now, FHA isn’t doing everything that the sub-prime guys were doing toward the end when Fannie / Freddie got into the business & started squeezing them out, but FHA was (and to a lesser extent, still is) guaranteeing loans that were absurd. 

It didn’t matter when house prices were going up and up.  That is how the SP boys covered up their credit quality issues for so long.  But, given that they are not going up any longer, what makes us think FHA will be so lucky?

I’m sure somebody is going to give me the 1934 speach and how there has never been a problem with FHA.  So, I’ll type some more to help you find my thinking on the delayed timing of the potential FHA bubble.

You will see in the article referenced below (which in turn references an article that will be in the Wall Street Journal tomorrow) that FHA 90+ delinquency is now 7.8%.  That is an un-freaking-believably high number, first off.  No small fiance company could ever survive such an insanely high delinquency rate, even with car titles for collateral.  

Much more importantly, whenever your growth is exploding, the actual measure of that delinquency is  terribly understated.  I call this the “John Henderson effect.”

What’s does the “John Henderson effect” mean?  In the small loan business in Macon (can you tell I had one?), all the managers knew about John Henderson.  If you knew John as a buddy (as opposed to a potential employer), you knew HOW John could walk into any loan office, take over, and make the books look a thousand times better in a short time.  He would tell you… “if they can walk into my office, they cannot leave without a loan.  If they fog a mirror when I put it under their noses, they qualify.”  (I first heard the “fog the mirror” statement more than 20 years ago!)

The reason growing fast by making bad loans makes your books look good today, is because your delinquency is always stated as a percentage of your outstanding loans… TODAY.  Your delinquencies, however, are coming from loans that you made YESTERDAY.  So, all you have to do to suppress delinquency, is grow FAST.

The problem is that we could not outrun sub-prime and Alt-A delinquency forever by making more and more bad loans.  The housing & mortgage industries are John Henderson’s employer.   We found the brick wall.  Boom.

Back to FHA problems.  When you read the Reuters blurb linked below, you will see that the growth in FHA loan volume has been insane over the past 2 years.  You already knew that.   My point here is that FHA didn’t have its bubble run in 2002 – 2006 like all the other loan programs… the FHA bubble run started in 2007.

OH MY LORD!  DO YOU MEAN TO SAY THAT 90+ DELINQUENCY IS UP TO 7.8% IN AN ENVIRONMENT WHERE THE VOLUME HAS GROWN BY 46% IN 2009 VS. 2008????  YOU MEAN EVEN THE JOHN HENDERSON EFFECT CAN’T COVER UP THE RISE IN DELINQUENCIES ANY BETTER THAN THAT?  HOW BAD WOULD IT BE IF THE VOLUME WAS STAGNANT?  15%, 25%, EVEN MORE? 

Now, I am concerned, not just because I close FHA mortgages for direct referrals, but because all of this will also affect, no doubt, the HECM program for seniors, who were never involved in the bubbles. 

BTW- I searched this morning for more updates on the section of the appropriations bill relative to cutting HECM benefits, and I can’t find any confirmed changes from my previous post on the subject.  It seems to be in limbo.  As I understand it, the appropriations bills have to be consolidated and passed by the end of the month, so news should be available at any time.  Still, I expect to see a reduction in HECM benefits as proposed by the House, because everybody sees FHA’s insolvency on the way.

Note that you can see the budgeted dollar amounts for all of HUD’s activities in the bill as it stands for the 2010 budget as I did when I was looking for that HECM information this morning.  The numbers for max guarantees and direct loan budgeting for FY 2010 does not jive with the information you will read via the link at the bottom to today’s post.

The bottom line?  Neither they, nor the FHA MIP insurance fund, will make it though 2010 as budgeted.  I expect emergency appropriations and big injections of your tax dollars by perhaps next Summer. 

Unfortunately, that event may either be preceded or otherwise trigger more serious tightening in FHA 203(b) & (k) forward mortgage underwriting standards.  And, I fear that it will result in reduced loan guarantees for seniors on the HECM program (for purchase & refi).  THOSE changes, if they occur, will put more pressure on house prices, wipe out the “less bad” news in housing that has recently shown up, and further frustrate us all.  What a vicious cycle.

As usual, the message here for potential homeowners or seniors is probably “Do it now, or forever hold your peace!”  Or, maybe you should tell them “Get it while you still can!”

Here is that link to Reuters:

http://blogs.reuters.com/rolfe-winkler/2009/09/04/wsj-loan-losses-spark-concern-over-fha/