Are we fixing the banking system or just moving the risk around?

09/18/2009 11:13 am EST


Jim Jubak

Founder and Editor,

Bad news out of the Federal Housing Administration yesterday.

The agency, which guaranted about a quarter of all U.S. mortgages made last year, told The Washington, that it has guaranteed so many mortgages for FHA-approved lenders that's its cash reserves will dop below the minimum set by Congress. For the first time ever.

The reserves are suposed to make sure that the agency can cover losses when a mortgage that it guarantees goes bad.

If this happend in the private sector, we'd say that the bank in question had made too many loans for its capital and that it needed to either raise capital to increase its reserves or sell loans to reduce its asset base.

But, of course, this isn't the private sector.

 The FHA carries much lower reserves, especially for the risk it assumes, than government regulators would ever allow in the private sector. The reserve requirement that the agency is in danger of violating is just 2% of outstanding loans.

And the FHA can't simply raise capital or dump loans because that would be prudent. Instead the agency needs Congressional approval.  

Think FHA Commissioner David Stevens is looking forward to approaching this Congress in the currnt political environment for billions in cash to add to reserves? As for either pulling back on lending or raising the fees that the FHA charges borrowers for its guarantes, those ideas are DBA (dead before arrival).

The FHA got into this position because the government was looking for a way to keep mortgage lending going when many private sector banks were interested in shrinking their mortgage books. And the remainder were interested in lending only if they could pass the risk to someone else.

Throwing the FHA into the gap was supposed to be a solution to problems in the private banking and home building sectors. But it looks like all it did was move the problem from investors to taxpayers.

Gee, what a surprise.
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