Here is brain twister: the government—and by that I mean President Obama, Christina Romer, Tim Geithner, et. al.—has blamed the financial crisis on banks taking on too much risk and being too cavalier with their lending. The government has criticized banks as having too lax of lending standards. The government says that banks became too leveraged, leaning on taxpayers for salvation. So why is the government doing all these things?
The Wall Street Journal reports this morning on some excessive risk taking at the Federal Housing Administration (FHA):
At a 50 to 1 leverage ratio, the FHA will soon have a smaller capital cushion than did investment bank Bear Stearns on the eve of its crash. (See nearby table.) Its loan delinquency rate (more than 30 days late in payments) is now above 14%, or from two to three times higher than on conventional mortgages. Its cash reserve ratio has fallen by more than two-thirds in three years.
The reason for this financial deterioration is that FHA is underwriting record numbers of high-risk mortgages. Between 2006 and the end of next year, FHA's insurance portfolio will have expanded to $1 trillion from $410 billion. Today nearly one in four new mortgages carries an FHA guarantee, up from one in 50 in 2006. Through FHA, the Veterans Administration, Fannie Mae and Freddie Mac, taxpayers now guarantee repayment on more than 80% of all U.S. mortgages. Sources familiar with a new draft HUD report on FHA's worsening balance sheet tell us that the default rates have risen most rapidly on the most recent loans, i.e., those initiated or refinanced in 2008 and 2009.
All of this means the FHA is making a trillion-dollar housing gamble with taxpayer money as the table stakes. If housing values recover (fingers crossed), default rates will fall and the agency could even make money on its aggressive underwriting. But if housing prices continue their slide in states like Arizona, California, Florida and Nevada—where many FHA borrowers already have negative equity in their homes—taxpayers could face losses of $100 billion or more.
This is ridiculous. It is one thing for banks to take these risks. They should be allowed to—and have to suffer the consequences of their actions. But the whole point of the government, and private, critique of the too big to fail system is that it puts taxpayer dollars on the line. The president has said time and again that taxpayers should not have to pay for the failures of Wall Street executives. Why should the government put them at risk for paying for the failure of DC bureaucrats?
Check out the full WSJ story.