FHA Reserve Ratio Plunges Toward ZERO

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machinehead's picture
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FHA Reserve Ratio Plunges Toward ZERO

From Bloomberg:

Nov. 12 (Bloomberg) -- The Federal Housing Administration’s mortgage insurance reserves fell to the lowest level in history and the government said more steps are needed to shore up the agency that guarantees one of every five single-family loans.

The net capital ratio, or reserves after accounting for projected losses, fell to 0.53 percent in the year ended in September, from 3 percent in fiscal 2008 and 6.4 percent in 2007, according to an annual review sent today. While FHA said the fund “has good prospects,” it is changing its risk models to account for the possibility of the ratio falling below zero.

“Additional actions” will be needed to shore up the agency, Housing and Urban Development Secretary Shaun Donovan said at a news conference in Washington today. The insurance fund tripled in size last year and has taken on more risk as private industry sources for lenders to finance and insure home loans dried up and mortgage default rates rose to record highs.

Donovan said the economy is worse than housing officials expected and projected claims against the insurance fund are higher than forecast. The fund is already below the 2 percent reserve threshold FHA is required to maintain by Congress.


Well let's see, boys and girls. If you ended last year with 3 percent reserves, and then you triple the size of the insured pool, your new reserve ratio will be what? That's right, class -- 1 percent! I am really impressed with your long division skills.

And then, if the worst housing market since the 1930s is causing insured losses, what's going to happen to your pro forma 1 percent reserves? You got it, scholars -- they go down even more! Such as to the 0.53 percent figure cited in the article.

Wow, that was a head-buster, huh? If you figured this out by your own self -- CONGRATULATIONS! You're an honorary rocket surgeon.

Or as ol' Yogi Bear might say, with his characteristic rising intonation -- "Smarter than the average government employee."

Man -- I need a high-paying sinecure where I can just recklessly blow through statutory limits to the tune of tens of billions and ... NOTHING HAPPENS. Ha ha -- this is fun! Print me some more, Bennie! Let's go shopping!

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