by Sober Look
The U.S. Federal Housing Administration (FHA), who continues to provide (via insurance) 30x leverage on mortgages by requiring only a 3.5% down-payment, is having a rough time. The loans the agency has been insuring are seeing worsening delinquency trends.
Reuters: – Fitch Ratings sees a growing divergence between 90-day past due delinquency patterns for guaranteed and nonguaranteed loans as a potentially troubling signal of future losses. This may eventually force the FHA to look for opportunities to put back some defaulted loans to the banks, particularly if the agency’s funding status worsens and U.S. home prices fail to rebound quickly.
For eight of the largest U.S. banks with substantial portfolios of FHA-guaranteed loans on their books, combined 90-day past due delinquencies totaled $79.4 billion at June 30. Of that total, 83%, or $66.0 billion, represented government-guaranteed mortgages.
This highlights the dimension of the growing delinquency problem for the FHA, given the predominant position of FHA-guaranteed loans in the troubled asset categories of major banks.While delinquency rates for nonguaranteed loans have been improving steadily at these institutions, the trend for FHA-guaranteed loans is starkly different.
In the spring the agency increased its premiums to insure mortgages by 75bp to 1.75% – which is still materially below market, particularly given the extremely low equity the borrower ends up having in his/her house. These FHA guaranteed mortgages are today’s version of the “subprime” market.
Reuters: – With many FHA-guaranteed loans in a negative equity position, the low required down payment of 3.5% for qualifying borrowers is likely to exacerbate default and delinquency trends over time, as borrowers have reduced incentives to continue making payments.
Since there is no appetite in Congress to bail out the FHA as its financial condition deteriorates, Fitch believes that the FHA may end up renegotiating its full protection on these mortgages with the banks who hold the loans. The agency may in effect default by paying less than its original principal protection – thus transferring some of the loss to the banks.
Reuters: – Absent a quick turnaround in delinquency and foreclosure trends, and assuming Congress will have little appetite for an FHA bailout in 2013 or later, we expect the FHA to evaluate unconventional methods to boost reserves, potentially including a more aggressive stance vis a vis banks over full insurance coverage of defaulted mortgages
If that were to happen, banks would simply refuse to participate in FHA’s insurance programs going forward and the FHA’s whole reason for existence will be in jeopardy. Maybe the madness of 30x leverage on mortgages will finally come to an end.
About Sober Look
Sober Look is a no-hype financial markets/macro blog that typically relies on data analysis, primary sources, and original materials. We keep it concise, to the point, with no self-promoting nonsense, and no long-winded opinions. If you are looking for Armageddon predictions or conspiracy theories, you will be thoroughly disappointed. Topics include financial markets, banking, asset management, risk management, derivatives, global economy, policy, and regulation, with the emphasis on finance education.
Like us on Facebook
- The Credit Writedowns Daily is out! http://t.co/tBY53Ufuph ▸ Top stories today via @went1955 @paulvieira @AlenMattich # 3 hours ago
- @Urban_Su @terencecorcoran @paulvieira I am a big believer in price-to-rent as a yardstick because it represents alternative use arbitrage # 3 hours ago
- @Urban_Su @terencecorcoran @paulvieira I believe there is clearly a bubble at least in Toronto and Vancouver. Agree Flaherty has to downplay # 4 hours ago
- Canadian FinMin: “we don’t have a bubble. If we had failed to take some action, we would have had.” http://t.co/UufdA7JHDH via @paulvieira # 5 hours ago
- Links: 2013-05-23
- On the Fed’s tapering and the volatility in Japan
- On European rebalancing and Germany’s excess savings
- Links: 2013-05-22
- Excess German savings, not thrift, caused the European crisis
- On Greece’s eventual exit from the eurozone
- Links: 2013-05-21
- On Germany’s response to Euroland’s problems
- Germany is willing to accept a higher inflation target but does it matter?
- Links: 2013-05-20
- Links: 2013-05-19
- Links: 2013-05-18
- Links: 2013-05-17
- Full text: Moody’s upgrades Turkey’s government bond ratings to Baa3, stable outlook
- Some thoughts on Canada’s housing market
- On big data and why Google’s Android is winning and fragmentation is no longer a problem
- Links: 2013-05-16
- Europe’s sinking economy
- Links: 2013-05-15
- Has house price deflation begun in Canada?
- Portugal’s Japanese Problem
- Feedback Loops
- The real experiment that is being carried out in Japan
- Android is killing iOS with nearly 75% share in Q1 2013
- Links: 2013-05-14
- Kyle Bass gets it wrong on Japanese bonds
- Money is Gold
- On claims of depositors, subordinated and creditors and central banks in bank resolutions
- Massive Iceberg Ahead for the European Monetary Union
- On Japan’s widowmaker trade and Reinhart and Rogoff
- Why the Reinhart-Rogoff paper was flawed right from the start
- A reality check on German household wealth
- Buiter: Most European banks are zombies
- On the crash in gold
- The Need for Wholesale Change
- What are the differences between QE1, QE2 and QE3?
- Spain’s economy is in tatters
- Buiter: ‘it was clear that Cyprus was a laboratory’
- In the long run we are all in trouble
- The largest European banks by assets
- Deposit insurance after Iceland and Cyprus
- Why Germans are poor
- Chart of the Day: Debt Deflation in the Eurozone
- How bond market vigilantes force rates higher
- Cyprus Bailout Deal Terms