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Too Big To Fail--Again?
On the heels of the one year anniversary of the market collapse resulting from systemic failure, those on Wall Street and in Washington are expressing concern over another entity's collapse--one who is again 'too big to fail'.
Just as Fannie Mae and Freddie Mac received yet another dire prognosis of their health from the federal agency charged with overseeing them--they have received $96 Billion from the Treasury and will most likely need to receive more, the FHA (Federal Housing Administration) is likewise receiving a questionable bill of health.
The FHA is the federal organization which guarantees mortgages with zero or low downpayments. And it is the FHA which is experiencing acute problems so drastic that some say might result in the need for a government bailout program.
These concerns apparently came to light during testimony by the FHA personnel before a House subcommittee on Thursday, October 8th, 2009.
During this testimony, David Stevens, the commissioner of the FHA commented that the administration would not need additional funds to survive and that the management of the risks associated with the mortgages it manages would be feasible.
Nevertheless, it was acknowledged that roughly 20% of the FHA mortgages guaranteed in the last twelve months and nearly a quarter of the loans insured since 2007 face drastic concerns--with foreclosure on those loans being among them.
As part of his testimony, Mr. Stevens stated: 'Let me simply state at the outset that based on current projections, absent any catastrophic home price decline, FHA will not need to ask Congress and the American taxpayer for extraordinary assistance - we will not need a bailout,'
Needless to say, this testimony by the FHA only adds fuel to the fire for critics who see a repeat of the Fannie Mae and Freddie Mac saga. Towards that end, a former executive with the troubled agencies commented that it appeared that the FHA would be in need of a bailout within the next 24 to 36 months.
Technology plays a role in that, similar to the process which caused the mortgage crisis, the FHA loans are bundled together into mortgage securities. It is this budling process which created the systemic risk to financial institutions a year ago. In this case, it appears as though Fannie Mae is the entity which is holding the bag.
The FHA now has more than 400,000 mortgage holders in default, approaching twice the number from twelve months ago.
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