FHA: 'Bailout Doesn't Apply'

Those are not my words, but the words of HUD Secretary Shaun Donovan toward the end of a lengthy explainer on the FHA's annual actuarial report, released this morning. The report shows capital reserves falling to .53 percent of total insurance, below the 2 percent Congressional mandate, and the lowest level in history.

But what does that really mean?

Ask HUD officials, and they'll claim not a whole lot. They don't go to Congress and ask for money; they don't go to the Treasury and start taking additional money. They do move some money around and they do face heightened political pressure and heightened scrutiny from the hoards of housing watchers who think government needs to get out of the housing industry's business.

FHA has gone from about 2 percent of the housing market to approaching 40 percent in just a few years. It now guarantees one in five single family loans. In turn, the estimated amount of earmarked loss reserves necessary to cover expected net losses on future cash flows went from $14.3 billion last year to $27.1 billion this year. Now FHA operates with something called "permanent and indefinite budget authority," which means it can tap the Treasury's ATM whenever it needs to.

Now we can go 'round and 'round arguing what is and what is not a "bailout" and whether the FHA would ever need to get more money to cover loan losses, but all of that makes my head spin. The real news out of today's actuarial report was nothing in the report itself. It was the blatant uncertainty regarding the current and future health of the housing market displayed by two of the top housing officials in the nation, Secretary Donovan and FHA Commissioner David Stevens.

And I don't blame them.

Today's release was actually delayed a week, after some numbers came back that didn't quite fly at the beginning of last week. The issue surrounded some "scenarios" above and beyond what the actuarial usually do, that were specifically requested by Donovan and Stevens. These scenarios ran the numbers with much deeper home price drops, much higher levels of unemployment and higher foreclosure rates. Why did they run them? Because they wanted to cover all the "just in case" bases. Donovan told reporters and industry members at today's conference that these were barely 1 percent possible, really worst-case-scenarios.

But when one reporter asked Donovan what his vision of the housing recovery is, he didn't seem quite so certain. He said the following:

"We are in an extremely volatile period."

"There is still a lot of volatility."

"We are still in uncharted territory."

Not exactly words I tell my kids when the thunderstorm is supposedly passing.

In an interview with me following the presser, David Sevens added, "We didn't do it [the extra scenarios] because we believe it is possible; we wanted just to be prudent, particularly with the extensive focus on the real estate finance industry in general and the new found focus on FHA."

The FHA will be able to make payments on loans that go bad. That's what they want us to believe, and it may be entirely true. But at what cost to the government and at what cost to the FHA itself? FHA is bigger than ever before and in a riskier position than ever before. They are caught between a rock and a hard place because while they'd like to reduce risk, their mandate is to exist to help the riskier borrower. The trouble is that so many more borrowers now fall into that category.

Right now Fannie, Freddie and FHA are the only games in town. Come Spring, when the Federal Reserve phases out its purchasing of GSE loans and MBS, mortgage rates will likely go up, and that will drive even more borrowers to FHA. From what I hear, FHA simply doesn't have the resources, the Congressional funding, to handle the risk management involved in the sheer numbers that may be to come. And do we want FHA to get that big? Donovan says it is playing a temporary role, as it's done historically during troubled economic times.

Questions?  Comments?