Subprime Crisis Part Two Coming Soon
Here we go again. The Credit Crisis is NOT OVER! and is only being exacerbated by US policy aimed to aggravate it further. This time, however, the federal taxpayer will be on the hook to bail out the government.
The center of this new impending subprime crisis is the FHA (Federal Housing Administration). The FHA insures mortgages that have less than a 20% down payment. It is currently insuring four times as many mortgages daily as it did in 2006 at the height of housing bubble. It now has 5.4 million loans on its books and has become a dominant factor propping up the housing industry. A prominent congresswoman recently stated, "Without the FHA there would be no mortgage market".
In congressional testimony from a few months ago, the head of this government agency claimed that the FHA's finances were sound. Oh really? The FHA currently has $30 billion in cash reserves on the books. How long will that last considering that there are $675 billion in loans and of those 24% of the loans from 2007 are troubled and 20% of the 2008 loans are troubled (these numbers can rise further)? Even a higher percentage of loans from 2009 could wind up troubled. Under the best of circumstances, if more than 4.4% of the loans insured by the FHA default, it will be out of money.
How is it possible that there are an increasing number of problem loans on the FHA books? This is happening because the FHA is picking up the business that subprime brokers used to handle. All you need in order to get this insurance is a 3.5% down payment. A spotty employment record doesn't disqualify you, nor does having filed for bankruptcy in the past. Most outrageous of all is that having a previous mortgage default on your record does not keep you from getting a new loan insured by the FHA! The FHA business model is roughly equivalent to a company offering $100,000 life insurance policies for $100 to hospital patients who are on life support. Yet, the head of the agency claims that their finances are in good shape.
The FHA is only one of many new bailouts coming. A number of state and local governments are falling deeper into the red. Tax receipts are coming in at even lower levels than anything previously thought possible (chalk this down to another mystery of the supposedly recovering economy). Small and midsized U.S. banks are failing at the fastest clip since the Savings and Loan Crisis. The FDIC insurance fund is insolvent and was only saved at the last minute by having its insured banks prepay three years of insurance premiums.
This could have been avoided if the US had successfully dealt with making the necessary, but painful improvements in the financial system in the first place.