• More FHA mortgages are underwater than the FHA’s analysis identifies, and unemployment is naturally particularly high in areas where FHA borrowers are furthest underwater. Therefore, potential default costs are underestimated.

• FHA’s analysis relies on house values that are inaccurate. Overvalued houses means the FHA could end up recouping less than expected on defaults.

• Underwater FHA mortgages that were “streamlined” into new FHA mortgages are not properly accounted for, which further underestimates risk.

• The FHA got clobbered on a previous no-downpayment assistance program. However, the current homebuyer tax credit can effectively eliminate downpayments on FHA loans, but its analysis doesn’t take this into consideration.  

Rather than looking to structure the markets of the future, they [policymakers] have stumbled along in business as usual mode, waiting for kind fate to save them. It may. Then again, it may not. Either way, this is not a good way to run a business, or a government for that matter. 

My best guess is that it will end with a crash in the housing finance sector, with the federal government forced by popular revulsion at mushrooming losses to remove itself almost entirely from the housing finance equation. The Resolution Trust Corporation will look like an amateur warm-up act…

 

The bottom line is simple. The continuation of “business as usual” is re-creating the essential problem that made the sub-prime crisis so disastrous. Once again, taxpayers have been forced to subsidize the private purchase of massive amounts of residential housing, and to offer guarantees against future losses, without any effort to reduce costs should their funding help turn some markets around. Warren Buffett made huge profits for his shareholders by investing in under-valued assets. By contrast, our leaders are making massive losses for taxpayers by investing in over-valued assets.