Nov 23, 2009
On November 12, the Federal Housing Administration (FHA) announced that its cash reserves had dwindled to almost nothing, as defaults on mortgages that it insures have skyrocketed. The FHA itself will almost certainly soon need a federal bailout.
The FHA, a part of the U.S. Department of Housing and Urban Development, insures mortgages of lower income and first time home buyers. It doesn’t protect the homeowners, but the lenders, that is, the banks and mortgage companies, in case homeowners default. Set up in 1934, under Roosevelt’s New Deal, FHA was always a form of government support to the financial establishment.
During the housing boom of the 2000s, when prices were quickly rising and there were few defaults, lenders turned fast profits by issuing mortgages, then reselling them to another institution. So lenders did not push homeowners to take out FHA insurance, because they faced no risk. But when the housing market crashed and mortgage defaults skyrocketed, banks and mortgage companies offered new mortgages to first time and low income home buyers only if the FHA insured them.
Over the last two years, the FHA lowered its requirements and the number of mortgages insured by the FHA quadrupled. It is currently insuring 6,000 new mortgages every day. In many harder hit areas, every single new mortgage is insured by the FHA.
With the housing market in free-fall and unemployment continuing to skyrocket, almost 20% of FHA-insured loans from 2007 are now considered to be “seriously delinquent.” For 2008 loans, 12% of them are already “seriously delinquent.”
More homeowners are losing their homes almost as soon as they move in. More taxpayer money is going to be swallowed up in another bailout. And big lenders continue to make profits from new mortgages, despite the ongoing crash in the housing market that they themselves caused.