HOORAY? Sub-prime mortgages “back to pre-crisis levels”

The Fed says sub-prime mortgages again make up more than 20% of the nation’s outstanding mortgages.

After plummeting in early 2008, the share of borrowers with FICO credit scores lower than 660 has returned to just higher than 20 percent, the same share as when subprime securitization peaked in 2006.

Once upon a time this number was a bad thing because all those loans were held by private institutions many of which basically collapsed when it turned out people couldn’t pay them off.

Today it is a good thing because Government-backed agencies Fannie Mae, Freddie Mac and Ginnie Mae "are providing unprecedented support to the housing market — owning or guaranteeing almost 95% of the new residential mortgage lending." So all is jake now that you, me and every other US citizen are guaranteeing these turkeys.

The reason for this rebound is not that due to any increase in the financial stability of people with lousy credit scores. No, it’s because the Federal Housing Authority seems determined to recreate the housing bubble “by providing vital insurance that enables borrowers to qualify for loans with as little as 3.5% down.”

The FHA is, of course, a picture of fiscal health. The agency recently admitted that “a soon-to-be-released audit will show that its reserve fund has fallen below the level required by law, meaning it will not be enough to cover 2% of all outstanding FHA mortgages.”

One solution proposed to get the agency’s reserves back up to what the law requires:  Raise the minimum down payment on FHA loans to 5%.

But – reports the LA Times — “new FHA Commissioner David H. Stevens said such a move could threaten the nascent housing recovery. A person looking to buy a $300,000 house, for instance, would have to raise an additional $4,500 for the down payment.”

If you can’t afford another $4.5K for the down payment, you probably can’t afford $300K either.

Says who?

The FHA itself. That’s because – just like in the last housing bubble – the lenders don’t really have a clue as to how much the borrowers can repay. We know this because the FHA has admitted it really hasn’t done much to screen the lenders for things like basic competence.

According to a report by the FHA inspector general: “The agency approved nearly 3,300 lender applications in fiscal 2008, more than triple the year before. But the number of workers evaluating applications remained the same. In a review of 22 approved applications, the audit found that only one contained all the necessary documents.”

History repeats itself first as tragedy then as farce, someone once said. Unfortunately the farce doesn’t leave you any better off than the tragedy.

By the time this is all done the economy will look like it’s been hit by a typhoon of monkeys.

BON TON ROULEZ!!!

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The kind of forward thinking people we want working on this problem

“These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.” —  Rep. Barney Frank of Massachusetts, September, 2003. Frank is now the chair of House Financial Services Committee.

Frank spoke against a Bush administration plan to create an agency to oversee Fannie Mae and Freddie Mac. The proposed agency would have had the authority “to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.”