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.

Federal judge cuts through the bailout rhetoric in New York courtroom

Think it's been awhile since there's been any straight talk about last year's $700 billion taxpayer rescue of the nation's financial system? Well, the wait is over. A federal judge in New York has issued a scathing ruling rejecting a proposed $33 million settlement of a lawsuit arising out of Bank of America's regulator-arranged takeover of the failing Merrill Lynch brokerage house, according to the New York Times. The ruling by U.S. Judge Jed Rakoff accuses the government's chief regulator, the U.S. Securities and Exchange Commission, of being too lenient and blames BofA officials for failing to tell their shareholders that Merrill Lynch had paid as much as $4 billion in bonuses to its employees just before the merger. The lawsuit was filed by the SEC against BofA, but the judge said the SEC and the bank came up with the settlement to absolve themselves of any further responsibility. “The S.E.C. gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger,” the judge said, according to the Times, and “the Bank’s management gets to claim that they have been coerced into an onerous settlement by overzealous regulators.” The judge ordered the parties to trial in February, pending what is likely to be numerous appeals of the ruling. The decision came on the same day that President Barack Obama told Wall Street banking executives in New York that "we will not go back to the days of reckless behavior and unchecked excess at the heart of this crisis.” Obama has proposed an overhaul of the federal government's financial regulatory system. The Times said the BofA case was one of several active investigations of the $50 billion merger, including one by New York State Attorney General Andrew Cuomo that is expected to result in a criminal complaint later this month. An investigation by the House Committee on Government Oversight and Reform also is underway, the Times said.