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Friday, November 6, 2009

Is FHA Broke and Contemplating A Cover UP?

Paul Muolo, editor and reporter for National Mortgage News has been one of the few in the media who has uncovered and reported the naked truth as to our financial breakdown. He has authored two very exposing books and continues to inform the public correctly.

In his recent weekly post in National Mortgage News column What We're Hearing, he reported on a planned HUD press conference where they were to disclose the results of their financial audit. The press conference was canceled the night before it was to occur with no explanation for cancellation at all.

Paul writes:
The next paragraph is for HUD secretary Shaun Donovan and FHADavid Stevens and concerns this past week's canceled press conference. The rest of you can scroll down to the next item. Shaun, Dave: What the heck happened? Who's advising you these days on media relations? (If you need any help give me a call. Let's do lunch. And, by the way, where's my FOIA on Lend America?) But seriously, gents: You don't call a press conference at the National Press Club in Washington and then cancel it the night before WITHOUT giving a real explanation. Shaun, you're in the president's cabinet! OK, so the audit looks a little dodgy and you're trying to get the numbers right. I get it - but don't put out a press release/e-mail without some explanation. Better yet, don't say you're even going to have a press conference and release the audit when it's not a sure thing. You wouldn't believe what the rumor mill was saying about FHA. (Remember: FHA has almost 30% of the market these days. Without it ... you can fill in the blank.) It sounds like the fund is broke but sources tell me it's not. Let me correct that, sources say there's still some money left in it. That's the good news. The bad news is that the fund covers $700 billion in mortgages. Meanwhile, the rumor mill says FHA premiums could rise. For the full story see Monday's NMN...
editors note: you must be a subscriber to read the full story.

Little has been said about FHA and even less reported by the media. but here is my comment submitted to Paul's post:
It is curious that FHA - the FHA Commissioner and HUD Secretary - canceled the press conference that would have announced their audit. However, it is not surprising. Optimistically they both probably thought the audit would be fine then found out it wasn't (just my opinion).

Addressing it logically, why would it be OK? FHA was the government's creation of sub prime after which all other sub prime was fashioned. Even that so called very toxic Option Arm Loan was a creation of FHA back in the 80's.

FHA required NO credit scores and allowed credit to be established by use of utility bills, phone bills and financed auto insurance. If you had a 12 month good pay history on those - you HAD credit. Then FHA only required 3% of borrowers cash in the deal. It was not necessarily a down payment requirement, it could have been in the form of closing costs. So basically, FHA did 100% financing. To enhance credit, you could use a non occupant relative's credit as well. And to make it even easier to buy and qualify, the seller could pay up to 6% of the buyers closing costs, prepaids and escrows.

Editors Comment Not Found In Original: Fannie Mae and Freddie Mac - so called conforming loans - required a minimum of a 620 credit score, 5% cash down payment and seller could only pay up to 3% of closing costs, pp's and escrows.

The market for FHA loans was primarily low income borrowers (you could have a much higher debt to income ratio with FHA) with little or no credit. SO YOU THOUGHT SUB PRIME WAS BAD, huh?.

These low income borrowers with little or no credit are the main victims of our failed economy and would, I believe, be a large segment of our unemployed.

FHA INSURES these loans to the lenders that actually make and fund them. THEY DO NOT MAKE LOANS as many are led to believe. So basically they are an insurance company probably facing a larger number of claims then they have cash to pay them. Not unlike what happened with Credit Default Swaps that brought AIG down.

Editors Comment Not Found In Original: Credit Default Swaps were basically insurance against the security failing. Wall Street created them, collected premiums but never set any money aside to pay claims. Fraud?
There has been little or no investigation, conversation or reporting on FHA other then, as you say it accounts for almost 30% of the market now.

But if sub prime failed so miserably - and those loans were all securitized and sold as are FHA loans - the banks/lenders had and have no risk as the risk fell onto the insurance (FHA) fund. If AIG failed because of Credit Default Swaps why does anyone think FHA could have survived with an inadequate insurance fund?  Kind of the same.

Fannie and Freddie cooked their books and the delay in the press conference is probably a way to figure out HOW to HIDE the real numbers from the public.

I, for one, say the fund is broke.

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