Bad news out of the Federal Housing Administration yesterday.
The agency, which guaranted about a quarter of all U.S. mortgages made last year, told The Washington, that it has guaranteed so many mortgages for FHA-approved lenders that’s its cash reserves will dop below the minimum set by Congress. For the first time ever.
The reserves are suposed to make sure that the agency can cover losses when a mortgage that it guarantees goes bad.
If this happend in the private sector, we’d say that the bank in question had made too many loans for its capital and that it needed to either raise capital to increase its reserves or sell loans to reduce its asset base.
But, of course, this isn’t the private sector.
 The FHA carries much lower reserves, especially for the risk it assumes, than government regulators would ever allow in the private sector. The reserve requirement that the agency is in danger of violating is just 2% of outstanding loans.
And the FHA can’t simply raise capital or dump loans because that would be prudent. Instead the agency needs Congressional approval. Â
Think FHA Commissioner David Stevens is looking forward to approaching this Congress in the currnt political environment for billions in cash to add to reserves? As for either pulling back on lending or raising the fees that the FHA charges borrowers for its guarantes, those ideas are DBA (dead before arrival).
The FHA got into this position because the government was looking for a way to keep mortgage lending going when many private sector banks were interested in shrinking their mortgage books. And the remainder were interested in lending only if they could pass the risk to someone else.
Throwing the FHA into the gap was supposed to be a solution to problems in the private banking and home building sectors. But it looks like all it did was move the problem from investors to taxpayers.
Gee, what a surprise.
Jim, Thanks for all your work. I enjoy your insights and and global/macro view down to the micro points such as stocks to capture those macro views. Now I believe you were going to make a Canadian bank call. Have you reconsidered or still analyzing the choices? With the strengthening of the loonie against the dollar would not these banks have a competitive advantage. What do you think of Bank of Nova Scotia and TD Bank?
Hi Jim, werent you supposed to make a technology sector pick yesterday?
thanks
Speaking of banks, check out CBBO today. The average daily volume is 19,000 + shares and as of noon, today’s volume is more than 1,300,000 shares. I dabbled in these shares earlier this year (it is my bank) but took my profits when the last 10-Q report came out and I decided its prospects had deteriorated to the point that it was only a matter of time before it was shut down.