Study: FHA Will Sink Below 2%

" to want to show everybody out there a graphic which if it doesn't make you nervous it it. It nation let's take a look at that this is a chart which is basically FHA reserve fund Federal Housing Administration right -- have the -- reserve. That is 2% more than 2%. Of their obligation writes for the threshold financial safety net if you will. The Red Line is that 2% threshold will recent reports suggest. That monetary reserves that is the gold bars rose three ought or ought five ex senator. Barbara if they continue their trend look at -- wait folks big drop in the previous year. If they continued their trend they will dip below that 2% minimum reserve level mandated by congress. If that happens could taxpayers all of you out there be on the hook for essentially a federal bailout. Of -- federal agency. At that there was a mortgage industry consultant is also the former chief credit officer. At Fannie Mae and he is our guest from Washington DC today mr. Pinto good to see again Brian Sullivan. This is a very nervous looking chart because if the FHA goes under that 2% reserve requirement. Either congress have to change the rules or the FHA have to come up with more money what's going to happen."

" I think odds are that FHA will sink below the 2% and -- probably. As they want to do change some of the rules to make it look like it's not major deal but it is a big deal. And I I think for the viewers it's important to -- recognize the history of FHA. Over the last sixty years there. New foreclosure starts on an annual basis have increased 75 fold. So that in 2009120. FHA loans are expected to have a foreclosure start. This history's been going on for sixty years and it's not about the change. 75. Fold increase in -- the FHA does not provide don't make mortgage loans but they insure them in other words. If you know you've got a federal backer -- light -- me if I'm wrong here at. You are more likely to make it questionable loan. Because you know the government is effect going to ensure that -- That that's absolutely right that's been one of the weak spots of FHA throughout its history is that it provides basically a 100% guarantee. To its lenders and a lot of lenders are brokers. And I'm so they have the usual broker problem they got many viewers can have a real life experience with this as you drive around. In city or suburban area you see a Condo building you'll see a sign in front of it that says 100% financing no down payment. Those are FHA loans and they're being used. To sell the leftovers from the real estate boom. For the federal government which is of course really just a collection of all of us right just taxpayers were the source of revenue Wright has been acting in bad loans -- now they've got the minimum reserve requirement which you think will be breached its close I mean. Do you think it will be breached. I definitely I think that was announced on Friday that they expect it will be breached any FHA announced that. And I I believe that a bail out. Is. Appears to be destined to happen for five reasons. First of all FHA is that being adversely selected in the -- said it's undertaking. In in in a declining housing market. Second it's dollar volume has exploded in the last thirteen years it's running four times its volume in 2006. For 2009. Third it's now insuring much larger loans. That it has in the past in many of these loans are in areas it hasn't really have been in the past particularly California. It talks about FHA says while our fight -- scores are higher. That's no panacea because the fair I think company which is the company that produces fire fight -- scores. Has indicated that a 6650. Today which is the average that FHA running is the equivalent of a 580 fight a score 34 years ago. A 585 comScore. Was deep into us sub prime. Also FHA has a very long history of fraud. And going back to its its early days and it's never really gotten a handle on it and so for all of these reasons I think -- It's just destined to require ballot at some point if you."

" Your social let me get this straight so none on with the fight goes scores dead -- also perhaps with this to prevent 2% pressure over the government can just kind of changes. You know the financial situation. Looks dire and the solution may be to simply move some numbers around without really changing the fundamental situation. So that suddenly you can say well where were above the cap or the cap no longer exists everything's fine. But you know what if you watch the segment right and listen to what you're saying it doesn't matter how much remove the numbers around. The FHA's financial situation it's. Again correct me if I'm wrong your head. Sounds pretty dire and taxpayers. Are likely to have a big book at a big bill to pay for this."

" That's actually right there's there's no amount of premium. That FHA can charge that can afford to cover the mounting defaults that. They're going to likely have giving the risk that they're taking. The more they make these loans the more defaults are going to have the higher the premium would have to be the mortal thoughts are going to have a higher premium there in a vicious cycle. That they need to break can get out."

" So we've got an FHA is this again a fair statement to make right now based on we've seen the signs that we see real you know realtors using he had that they take qualification -- Basically the FHA. Right now is the housing market correct. If you are back and."

" And Freddie Mac are the housing market there about nine the percent of the new loans that are being Nader FHA. Freddie Freddie Mac Fannie Mae which are all government owned. And also -- very. A large problem is that about 80% of all of the investment. In new loans is being made by the federal government they have the federal government guaranteeing. 90% of all the credit risk new credit risk you have been buying up 80%. Of all of the mortgage mortgage backed securities they have nationalized. The mortgage industry in this country and they're going to have a very difficult time backing out of it."

" So it's like big gambler at the table in Atlantic City -- Vegas that they're losing they look they go to the ATM machine to take more money out they go back to the table to try to win to pay back -- alone. They lose again. They just keep its circular right the government is trying to they're gone all in you know they're gonna -- they're trying to ease credit on our loans. Pushed the real estate market up so that they can incensed bailout their own problem. But if they end up losing and the ATM. Empties. -- who's going to -- that attacked us right that that's false that's exactly right at the end of the day."

" They have shifted the mortgage risk almost entirely on to the federal government so if they miscalculate. They basically own at all not only the credit risk but the mortgages themselves they're buying -- over a trillion dollars. Of mortgages and mortgage backed securities that are backed by fixed rate loans at around 5%. If interest rates go up. As little as 2% which still would be historically low level 7% rate. Then. -- will value of those mortgages goes down by about 25 to 30%. This is some scary stuff that."

" It is baffling. Pinto mortgage industry consultant former -- chief credit officer Fannie Mae at thank you very much we do appreciate your time today appreciate it thank you very much."