FHA: Lending with a 20%+ default rate expectation

This blog has mentioned before that FHA is subprime in sheep's clothing. But how bad is it?

"Although the FHA has tightened credit standards, many of the 2007 and early 2008 mortgages are going bad. The agency expects defaults on 24% of all loans insured in 2007, and 20% of those backed in 2008. "The orders from Congress and us were clear: We want to save as many families as we can, recognizing that a lot of loans people were looking to refinance out of should never have been made in the first place," said Brian Montgomery, who served as the agency's commissioner for four years ending in July."(1)

Although there have been lots of assurances to the contrary, it looks like a bailout is now in the works.

"Two House Republicans warned that growing losses at the Federal Housing Administration could lead to a taxpayer-funded bailout and have asked the Department of Housing and Urban Development for data backing up the FHA’s assertion that it won’t need to ask Congress for any taxpayer money.

“Congress and HUD must take whatever steps are necessary to ensure that this program operates in a manner that does not expose the taxpayer to yet another bailout,” wrote Republicans Darrell Issa of California and Spencer Bachus of Alabama in a letter, dated Monday, to HUD Secretary Shaun Donovan."

Apparently news leaked that the stress tests used in the audit showed FHA is doomed at current capital levels.

Likelihood that a bailout will be avoided, I put it at 10%. But who cares, the DOW is up. Right?

(1) "FHA digs out after loans sour", WSJ, written by Nick Timiraos, Nov 4, 2009

(2) "FHA postpones release of audit as bailout worries mount" WSJ, written by Nick Timiraos, Nov 5, 2009