November 15, 2011

FHA Bailout. New Bill To End Fannie & Freddie.

November 15, 2011

FHA Bailout. New Bill To End Fannie & Freddie.

Is FHA Next Housing Bailout?
There’s yet another study shows that the FHA insurance program is materially undercapitalized and will require a capital infusion of $50 billion to $100 billion in the next few years – even if housing markets do not deteriorate any further.

The study, entitled “Is the FHA the Next Housing Bailout?” and written by Joseph Gyourko at the University of Pennsylvania Wharton School, describes the FHA present state as precarious, Gyourko says for the past two years the nation’s 77-year old insurer has been in violation of its capital reserve regulation.

The reserve is supposed to hold sufficient reserves against unexpected future losses on the insurance it has issued. To comply with this rule would require a $12 billion capital infusion in fiscal year 2010, his research found, and that presumes that future losses are not being underestimated by FHA. And last year New York University and the New York Federal Reserve issued a paper warning of the growing likelihood the FHA would need a taxpayer bailout.

Full report linked below.

New Bill To End Fannie & Freddie
As for those other big government-backed mortgage supporters Fannie and Freddie, U.S. Sen. Bob Corker (R-TN) has announced the introduction of the Residential Mortgage Market Privatization and Standardization Act to responsibly unwind Fannie & Freddie “and end dependence on the government for housing finance.”

The Act (linked below) would gradually reduce the portfolio of mortgage-related assets guaranteed by Fannie Mae and Freddie Mac and take steps to bring uniformity and transparency to the housing market so that private capital can begin to replace the GSE’s. Corker noted, “We are no closer to transitioning Fannie Mae and Freddie Mac off government life support than the day the firms were taken under direct government control in 2008.”

First off, this is an introduction of a bill, and second, no one expects anything to happen before November 2012, but it is interesting to see the elements.

For example, it reduces each year the percentage of newly issued MBS principal that is guaranteed by Fannie Mae and Freddie Mac. The percentage guaranteed must be reduced to zero within 10 years, at which point MBS will be wholly privatized.

It creates an industry-financed database that makes uniform performance and origination data on mortgages available to the public through the FHFA.

It initiates a process for creating deliverability rules and technology necessary for the “to-be-announced” (TBA) futures market with no government guarantee.

It replaces the QRM and risk retention with a 5% minimum down payment and full documentation requirement.

And it seeks to create a uniform pooling and servicing agreement (PSA) and a new electronic registration system (MERS 2) where all loans are transferred under one system regulated by the FHFA and instructs federal regulators to develop uniform practices and streamline mortgage regulations.
Is FHA The Next Bailout?
HUD Report On FHA Financial Status: CalculatedRisk
New Bill: Mortgage Market Privatization Act