As indicated in the chart above (courtesy of yesterday’s WSJ), the FHA’s leverage ratio has increased from a modest 14: 1 in 2003 to an expected 50:1 by the end of 2009. This far exceeds Bear Stearn’s 33:1 leverage at the time of its rock bottom sale to JP Morgan. While the FHA continues to insist that they won’t need a federal bailout, similar to the claims made by Fannie and Freddie prior to their government takeover, a mere 2% loss rate would wipeout the FHA’s capital position. Given that its loan delinquency rate (more than 30 days due) exceeds 14%, a national unemployment rate slowly creeping towards double digits, and the agency’s subprime like borrowers (who only have to come up with a mere 3.5% to qualify for a loan) I remain highly skeptical that the agency will avoid seeking some sort of federal assistance.
While yesterday’s Case Shiller index provided yet another positive data point for housing (only 2 of the 20 regions in the index posted sequential declines in housing), it is important to emphasis how dependent housing has become on the government. As I indicated in my prior post, the FHA’s market share has increased from a mere 2.7% in 2006 to approximately 25% today (and 40% in August alone!). The agency insures approximately $750 billion of mortgages today from $410 billion in 2006. Even more concerning is the projected growth in the agency’s portfolio, which is expected to exceed over $1 trillion by the end of next year. As a point of reference, Fannie and Freddie collectively insure approximately $5 trillion of mortgages or half all of all home mortgages.
Remember how fragile this housing recovery is the next time you see those shady infomercials encouraging you to refinance into an FHA loan. However, instead of some faceless pension fund in Japan taking a loss on its portfolio of securitized subprime Countrywide mortgages, US taxpayers will be left holding the bag from these busted FHA loans.
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