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.

Are U.S. regulators proposing covering bank failures with accounting tricks?

Could it possibly be true that regulators are proposing to use an accounting trick to replenish the beleaguered FDIC fund that protects bank deposits? That's what it seemed like Tuesday when the Federal Deposit Insurance Corp.'s five-member board voted to require banks to prepay $45 billion in quarterly fees but not require them to account for the money until later, according to the Reuters international news service. The proposal, released for a 30-day public comment period, is intended to help shore up the FDIC's bank failure fund, which is expected to pay out $100 billion through 2013. The fund is expected to be in the red later this year and remain in the red through 2012, Reuters said. Ninety-five banks have failed so far in 2009, compared with 25 last year and three in 2007. The prepayment will enable the banking industry to avoid another emergency assessment like the $5.6 billion fee levied on banks in May, Reuters said. "Everybody has bailout fatigue," said FDIC Chairwoman Sheila Bair, explaining that the prepayment would avoid forcing the agency to use its $500 billion line of credit with the U.S. Treasury. The proposal would require banks to prepay their regular assessments for all of 2010, 2011 and 2012 when they pay their regular assessments for the fourth quarter of 2009 on Dec. 30. Bair said her agency had plenty of money to protect depositors despite the negative balance in the fund. "We have tons of money to protect insured depositors," she said. "This is really about the mechanics of funding." Actually, it sounds some kind of game-playing, precisely the wrong signal to send to nervous depositors all over the country. If adopted, the proposal would be the first time the agency has ever asked banks to prepay regular fees, Reuters said.

General Motors emerges from bankruptcy after crash diet

The rich elite in the United States must be different from ordinary folks. How else to explain the behind-the-scenes maneuvering that brought the largest U.S. automaker, General Motors, out of bankruptcy in a lightning-quick six weeks and lighter by tens of billions of dollars in debt. With the completion of the sale of assets Friday to a company set up solely to liquidate them under bankruptcy court supervision, GM returns to the competitive world of automobile designing, building, servicing and selling -- largely under the same management that led the company's decline, according to Cable News Network (CNN). Of course, there'll be some major differences -- GM is now more than 60 percent owned by the U.S. Treasury. In addition, by the end of next year, the new GM will also be lighter by tens of thousands of jobs and thousands of dealerships across the country. "This is an exciting day for General Motors, one that will allow every employee, including me, to get back to the business of designing, building and selling great cars and trucks and serving the needs of our customers," GM Chief Executive Fritz Henderson said, CNN reported. "We deeply appreciate the support we've received. We'll work hard to repay the trust, and the money, that so many have invested in GM." But Henderson, who took over the top spot at GM after the Obama administration forced out then-CEO Rick Wagoner as a condition of loaning the automaker as much as $50 billion, faces a daunting challenge. GM lost most of its market share, now 20 percent of the U.S. market, in the last few decades, was overtaken by Toyota Motor Co. of Japan as the world's largest automaker, and even lost its standing as a component of the Dow Jones Industrial Average. GM also will be losing its Saturn, Saab and Hummer brands, and previously decided to drop Pontiac. Henderson even said that he didn't know if GM would be able to repay the billions it borrowed from the treasury, according to CNN, but probably wouldn't have to borrow more next year. "This is a precious second chance," he said. "There are no third chances." Even if there were, who could afford them? GM has lost $88 billion since 2005 while its debt rose to $54 billion, CNN said. Bondholders who loaned money to GM before the bankruptcy will end up with around 10 percent of the new company, CNN said, but shares will not traded until next year at the earliest.