Wednesday, February 3, 2010

Up in smoke?

Doggone, we hate being pessimists but tell us where we are missing the signs that the housing market isn't resting on another artificially inflated bubble that is about to collapse.

The share of borrowers who are falling seriously behind on loans backed by the Federal Housing Administration jumped by more than a third in the past year, foreshadowing a crush of foreclosures that could further buffet an agency vital to the housing market’s recovery.

About 9.1 percent of FHA borrowers had missed at least three payments as of December, up from 6.5 percent a year ago, the agency’s figures show.

Although the FHA’s default rate has been climbing for months and eating into the agency’s cash, the latest figures show that the FHA’s woes are getting worse even as the housing market shows signs of improvement. The problems are rooted in FHA mortgages made in 2007 and 2008. Those loans are now maturing into their worst years because failures most often occur two to three years after a mortgage is made.

If the trend continues and the FHA’s cash reserves are exhausted, the federal government would automatically use taxpayer money to cover the losses — a first for the agency, which has always used the fees it charges borrowers to pay for its losses.

(H/T: Hot Air)

Bounce that against this from the TARP Inspector General:
To the extent that the crisis was fueled by a “bubble” in the housing market, the Federal Government’s concerted efforts to support home prices risk re-inflating that bubble in light of the Government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.

H/T: W.C. Varones

In the IG’s report the term "moral hazard" is used and is deemed an important enough term to have it’s definition explained in the margins of the report. Moral hazard is an economic and insurance term used to describe the lack of incentive an individual may have when it comes to guarding against risk. In short, what incentive do you have to maintain a car worth $10,000 when it is insured for $20,000? You don’t. In fact, the whole scheme becomes perverse as you are running for the lighter fluid to torch that puppy to collect on the insurance.

And it’s this moral hazard that represents the ultimate failure of Bailout Nation. Everyone from bank execs to lenders to homeowners have been presented a (false?) sense of security. The consequences that would normally result from bad/risky behavior in a free market are blunted if not eliminated altogether by the myriad of federal bailout programs that are having the same exact effect on the concept of personal responsibility as has the failed policies of the welfare state except on a much grander scale.

1 comment:

SarahB said...

Makes me feel slightly better about my dream home being snatched by yet another investor last week. Two years of house hunting and nothing! Maybe it was all meant to be when prices collapse yet again.