Thursday, October 8, 2009

FHA may need bailout for poor loan oversight practices

News from Washington that another giant federal home mortgage agency was collapsing under the weight of ill-advised loans is a surprise only in that U.S. authorities, like their private industry counterparts, still seem incapable of learning from their now legendary mistakes. Some 20 percent of loans guaranteed by the Federal Housing Administration last year and 24 percent of loans from 2007 are in trouble, including default, according to the New York Times. But FHA has continued at a furious pace, four times as fast as last year, guaranteeing more than 6,000 loans worth $1 billion every day with the commercial home loan market nearly frozen, according to testimony today before Congress, the Times said. Congress is looking into concerns that the FHA could need a bailout in the next three years as its reserves fall, similar to what happened to government mortgage giants Fannie Mae and Freddie Mac. The two agencies have already borrowed $96 billion from the U.S. Treasury and may need more, the Times said. FHA Commissioner David Stephens told Congress that his agency would not need a taxpayer bailout, despite the reports. “Let me simply state at the outset that based on current projections, absent any catastrophic home price decline, FHA will not need to ask Congress and the American taxpayer for extraordinary assistance — we will not need a bailout,” Stevens testified. But FHA critics were not mollified, and insisted that a bailout was looming. “It appears destined for a taxpayer bailout in the next 24 to 36 months,” said Edward Pinto, a former Fannie Mae exec, in testimony prepared for the hearing. Pinto, Fannie Mae's chief credit officer from 1987 to 1989, said losses would more than wipe out the agency’s $30 billion cash reserve. FHA loans are commonly packaged together and sold to investors as securities with backing by the U.S. Treasury through the Government National Mortgage Association, also known as Ginnie Mae.

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