If FHA’s losses are due to bad economy, why is Fannie blaming borrowers in lawsuit against Bank of America?


According to BloombergBusinessweek just two days ago on November 15, 2012, the Federal Housing Administration (“FHA”) is going to need to be the next multi-billion dollar taxpayer funded bailout.  The aid will have to come from the U.S. Treasury before the end of the year in order to make up for losses caused by defaulting loans it insures.


That should NOT be “news” to anyone paying attention.  Everyone has been talking about FHA being “the next bailout” for almost two years.  In fact, former Fannie Mae Chief Credit Officer, Ed Pinto was my guest on a Mandelman Matters Podcast last March, and he’s studied the problems at FHA as much, if not more, than anyone.  (If you haven’t listened to it… click that link above… you should.)


This past week, House Financial Services Committee Chairman Spencer Bachus said during a press conference in Washington that the agency’s plan to increase the premiums it charges won’t be enough to cover what the FHA needs.  Bachus described FHA as “burning through” its last $600 million,”


BUT HE DID NOT criticize the government mortgage insurer… nor did he blame irresponsible borrowers… instead he blamed FHA’s losses on “the economy.”


Fascinating, don’t you think?


Keep in mind that today’s FHA insures a portfolio of about $1.1 trillion in home loans, which is roughly 15 percent of all U.S. residential mortgages.  And last March, Ed Pinto told me that his calculations showed that the FHA was leveraged at over 800:1.  Yes, you read that correctly… 800 to one.  One dollar of assets for 800 dollars in loans.


And to put that in perspective, Fannie Mae was leveraged at under 200:1 and it went under and had to be taken over by the government when the market started falling.  And Lehman Bros. was leveraged at around 40:1 when it flamed out, if memory serves.


Apparently, FHA officials have explained to Chairman Bachus that they will need a financial backstop within a month.  (A “financial backstop?”  That must be the new word for “bailout.”)


According to Bachus…


“Because of the number of foreclosures, they’ve (FHA) indicated they will have to come to the American people and ask for money.  These are just a wave of foreclosures which we obviously are not over.  It’s basically a function of a bad economy.”


But, the really interesting thing to keep in mind here is that the Treasury Department DOES NOT NEED to get approval from Congress in order to allocate the money to bailout the FHA.  So why is Bachus prepping us for the next bailout if he doesn’t have to “sell it?”



The FHA is a government agency and could just present Treasury with a bill and Treasury could just pay it… just like any federal agency.  The FHA is not like Fannie or Freddie, which were only quasi-government agencies… which at this point is just stupid, so we don’t need to waste time thinking about it now.  The point is you could buy shares in Fannie Mae… you can’t buy shares in the FHA.


According to the BloombergBusinessweek article…


“The FHA is scheduled to release its annual actuarial report, which is expected to project that losses from defaults on the loans it insured from 2005 to 2009 in an amount that will exceed the value of its insurance fund. That report will provide a picture of the agency’s financial situation, is separate from any eventual request for a draw from Treasury.”


And again… no surprise there.  Look, here’s what’s been happening since 2008.  Our government has been using the FHA’s ability to guarantee loans as the replacement for the sub-prime lenders that went bankrupt starting in 2007.  Here’s how Bloomberg put it…


“The agency provides liquidity to the housing market by insuring lenders against losses on loans with down payments as low as 3.5 percent. Lenders are made whole if the mortgages default.  Unlike Fannie Mae and Freddie Mac, the mortgage finance companies operating under U.S. conservatorship, FHA doesn’t package loans into securities or guarantee principal and interest payments.”


So, we’re talking mortgages with almost nothing down… for people with credit scores as low as 520 or whatever?  What does that sound like to you?  And FHA is going to end up, according to Ed Pinto, with something like 20 percent defaults.  SINCE 2009?  DID WE LEARN NOTHING HERE?


Actually, I don’t think that we learned nothing, I think it’s more like a combination of we’re addicted to sub-prime loans and don’t know any other tricks… and the finance industry has way too much clout in Washington and it saps our political will to change much of anything.  But, that’s not news either.


So, ahead of FHA releasing its report showing it needs a bailout, Bloomberg says that, “FHA officials have been publicly emphasizing the role the agency plays in the economy as a backer of home loans for low-income borrowers who do not have large down payments.”


The government-backed mortgage insurer until now has covered its costs with revenue from premiums. In the past two years, it has raised premiums and tightened credit standards in an effort to avoid asking for a taxpayer subsidy.


Apparently, they’ve even been sending out messages on Twitter with the hashtag: #FHAmatters. 


FHA matters?  You’re kidding me.  Cute… like Mandelman Matters.  Except I’m guessing that I don’t quite matter enough to get a “financial backstop” too.  That’s okay… to the 85 year-old widow in Glendale who isn’t going to be evicted ever because of me, I bet I matter way more than the sewer that is the FHA ever would.


Okay, so I’ll call Ed Pinto tomorrow to find out just how bad the situation is at the FHA today, but based roughly on his numbers from last Spring, and on Bachus’ statement about how the FHA is “burning through its last $600 million,”  I’m going to peg the first FHA bailout at $200 billion… maybe even $300 billion… although they may not admit is all at once.  It’ll probably be like the GSEs that keep needing another $5-10 billion as most quarters end, but everyone knows will come out north of $200 billion, if not more.


Truth be told, I’m intentionally guessing low.  It could be a lot more when all is said and done defaulting.


And it doesn’t have anything to do with securitization at Fannie Mae or no securitization by the FHA.  The FHA may not formally securitize loans, but they do so informally.  The only difference is that the FHA has every American taxpayer as investors in their pool.


(By the way, in case you haven’t listened to my podcast with Catherine Austin Fitts, she used to run the FHA under the first President Bush back in the early 1990s.  She fascinating to listen to so if you haven’t heard what she has to say, click her name above to link to the podcast.)


But, as Bachus and the FHA has made quite clear… it’s really no one’s fault… it’s just the economy and the foreclosures that we’re not done with yet, right?  Fair enough… in fact, that’s exactly what I’ve been trying to tell everyone for FOUR years: Stop blaming the borrowers.  So, now they finally have… so, good.


Are you reading between my cleverly written lines here… or has your ADD kicked in and my real point is going over your head?


Our government has learned something since 2007, haven’t they?  Back then I wrote an article warning the government not to start blaming “irresponsible sub-prime borrowers” for the crisis, because as I explained, if they did that they’d never be able to get the political support they would need to solve the problem as it grew.  Of course, who listens to me, so they did it anyway and what happened?




Exactly what I said would happen… we know what to do to solve the foreclosure crisis problem… it’s not rocket surgery after all.  But we lack the political will because half the country is vehemently opposed to “bailing out irresponsible sub-prime borrowers.”  Get it?  It’s the fuel behind the founding of “The Tea Party,” right Rick Santelli… you bond trading jackass?


Rick didn’t want to pay for his neighbor’s kitchen remodel or extra bathroom, if I remember his rant on CNBC correctly, so instead he’s got us paying untold trillions for millions of foreclosures that could have been stopped for a tiny fraction of what we’re paying.  On Mandelman’s Moron Scale of 1-100… where Mr. Magoo is 100… Rick is so far off the charts he could be at one million.  It’s amazing the man can tie his own shoes and make it to work every day without causing harm to the City of Chicago.


Remember my article titled: “Our future hinges on just ONE thing?”  Yeah, I know it’s long… but it has a lot to say.  Check it out and it will explain this issue in detail.


So, it seems that our government has learned that blaming borrowers for this mess isn’t such a red-hot idea.  Kind of paints one into a corner, just ask Fed Chief Ben Bernanke, he knows what that feels like better than anyone.


Okay, so if the FHA represents 15 percent of all mortgages in this country… and since its bailout can’t be blamed on anything but “the economy,” then why are Fannie and Freddie suing Bank of America for $1 billion… and besides that… why are so many homeowners happy about that lawsuit anyway?


Look, I’ve been biting my tongue for two weeks about this issue, and I wasn’t going to say anything, but the heck with it… homeowners shouldn’t be happy the FHFA is suing Bank of America for a billion dollars.  The suit is crap… it’s just another attempt to “blame the irresponsible borrowers.”



Fannie Mae may sound like she’s your elderly grandma, but she’s every bit the Great White shark Goldman Sachs ever thought about being.  The lawsuit basically alleges that Countrywide sold Fannie loans that defaulted, but whose fault is that?


Why aren’t these Fannie loans defaulting for the same reasons as the FHA loans now being referenced by Bachus?  How come when FHA needs a few hundred billion it’s caused by “the economy.”  But when Fannie Mae loses money for THE EXACT SAME REASON, they cry “it’s the deadbeat borrowers that done it,” on their way to ask the court to protect them from their losses.


Fannie Mae knew what they were buying… they wanted the relatively high interest rates offered by pools of sub-prime loans.  So, they invested $200 billion, bought some loans and lost some dough when the bond market froze solid, the CDO market collapsed and the housing market followed suit.


So what?  I lost money when the housing market collapsed too.  Can I ask some court somewhere to protect me from my losses too?  Not likely… in fact, not a chance in the world.



It’s like the German bank that J.C. Flowers owns 25 percent of that last April tried to sue UBS over a similar deal that went south, costing the German bank $500 million, while UBS actually made a bundle.  The judge had the good sense to throw Mr. Flowers and his German banker buddies at HSH Nordbank out of federal court in New York, and I couldn’t have been happier about it.


You can read about it in my article: “New York Appeals Court Says Investors Can Take Care of Themselves.”


J.C. Flowers, in case the name isn’t ringing any bells, is the guy who built Goldman Sach’s financial institutions mergers and acquisitions practice, among other things… he doesn’t require any special protection from our legal system when he find himself on the short end of a deal with another international banking shark.  He was just unhappy that he didn’t get to screw UBS out of a few hundred million in that particular instance, but don’t worry because I’m sure he’ll stick it to someone else twice as hard to make up for it.


That’s why he’s J.C. Flowers… Harvard grad with a degree in applied mathematics that made partner at Goldman in 1988.  After leaving Goldman in 1998, he was the main partner in a venture that acquired Long-term Credit Bank of Japan and turned it into Shinsei Bank.  When Shinsei went public a few years later, Flowers made about a billion.  Nice work, if you can get it.


Look, if a mortgage banker screws some homeowner… that’s one thing.  But when you’re talking about Fannie Mae… the mega-behemoth mortgage monster of the entire world… then we shouldn’t be feeling sorry for them because some of their investments didn’t pan out as expected after the U.S. and global economy fell off a cliff.


Fannie Mae in 2013 should not get to run into court whining: “Oh, it was Bank of America and Countrywide fast-tracking all those deadbeat borrowers into loans… and we didn’t know what was happening… we were the victims of the bad borrowers who the banks let into our perfectly profitable world.  Help us Your Honor, we had nothing to do with any of this…”


Yeah right… I’m supposed to feel sorry for Fannie Mae?  Not going to happen.  And I have to tell you that it cracks me up to see homeowners cheering, “Yay!  Fannie Mae is suing BOA!”  Why the hell are you guys cheering?  This lawsuit is just another way for DeMarco’s FHFA to call you deadbeat borrowers and blame you for their losses.


The only reason Fannie is suing BOA and not defaulting homeowners is that the homeowners who defaulted don’t have any money.  If they did, you better believe that Fannie and Freddie would be suing the “irresponsible and deadbeat, lying homeowners,” the same people cheering the lawsuit against BOA.


So, when FHA needs a bailout because of loans defaulting it’s the fault of the economy.  That’s fine.  But when Fannie Mae loses money as a result of defaulting loans it’s because the loans were made to deadbeats?  Like hell.


If I’ve said it once, I’ve said it a thousand times, the VAST MAJORITY of people didn’t’ buy homes they knew they couldn’t afford.  No one does that on purpose.  Certainly not regular working class people… they all know how much money they don’t have each month… and the last thing they want to do is lose their homes to foreclosures because they can’t make the payments.


They don’t buy cars with payments they can’t afford either.


Anyone who doesn’t understand that is way out of touch with how regular people think and operate.  Rich people might gamble and take a chance with the purchase of a home, but not working and middle class folks.  Regular people bought homes because they viewed doing so as being the safe and responsible thing to do.


Chairman Bachus is right… FHA loans are defaulting because of our economic downturn and resulting ongoing foreclosure crisis, so we’re going to have to bail them out.


Of course, what he fails to mention is that if our government had done ANYTHING RIGHT in terms of dealing with the economic crisis that started in 2007… if even ONE of the programs that have been implemented over the last SIX YEARS had been well designed and therefore effective…


… well, then we wouldn’t be where we are today… now would we?  No we would not.


And whom can we sue for that ongoing systemic and catastrophic failure, because shouldn’t Fannie and the FHA be suing that same entity for the losses they continue to experience today?


Mandelman out.


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