Affordable Housing Institute : US

By: David A. Smith

 

Can a government bank fail? 

 

Something a little less visible than that

 

In the space of a week, that question’s surfaced about two governmental banks – FHA in the US and the World Bank – in stories in the New York Times (which I’ll excerpt in plain text) and UK Telegraph (in indigo palatino), but as we’ll see, the source of the evidence, and hence the threat credibility, vary extraordinarily.  Let’s start with the World Bank:

 

The World Bank is close to ‘running out of money’, its president, Robert Zoellick, has disclosed.

World Bank president Robert Zoellick has launched a major campaign secure more funding from rich nations

 

Mr. Zoellick succeeded the brilliant blockhead Paul Wolfowitz (brilliant economist, blockhead manager) and has evidently brought stability and a renewed sense of organizational worth to the World bank staff (full disclosure: I know many incredibly good people who work there).  He’s in a position to know the bank’s financial position.  However, in saying that the bank could ‘run out of money,’ he does not mean bankruptcy, but rather lack of liquidity:

 

The Bank, whose job it is to support low-income countries, has had to hand out so much cash in the wake of the financial crisis that it faces a shortfall in what it can spare for new projects within 12 months.

 

“By the middle of next year we will face serious constraints,” said its president Robert Zoellick, as he launched a major campaign to persuade rich nations to pour more money into the Washington-based institution.

 

Formerly open for business

 

The bank gets its capital from developed nations, and then makes loans to developing nations.  If those nations do not repay as timely as expected, the bank may have capital (loans receivable) without cash.  Should those loans go bad – as commercial and residential loans do, as we have discovered – then the World Bank could become insolvent, but since its creditors are sovereign nations who as a general rule are not seeking repayments to pro up their own liquidity, a more practical outcome is an inability to lend further.

 

Lack of liquidity or total insolvency?

 

That’s less serious than the problem being alleged about FHA:

 

A year after Fannie Mae and Freddie Mac teetered, industry executives and Washington policy makers are worrying that another government mortgage giant could be the next housing domino.

 

Problems at the Federal Housing Administration, which guarantees mortgages with low down payments, are becoming so acute that some experts warn the agency might need a federal bailout.

 

As we’ll see, this appears to mean ‘one expert.’

 

Running questions about the FHA’s future — underscored by interviews with policy makers, analysts and home buyers — came to the fore on Thursday [October 8, 2009 – Ed] on Capitol Hill. In testimony before a House subcommittee, the FHA commissioner, David H. Stevens, assured lawmakers that his agency would not need a bailout and that it was managing its risks.

 

Stevens says he’s managing the risks

 

Unlike most of his recent predecessors at FHA, Mr. Stevens’ background is in single-family, not multifamily.  That’s logical since the HUD secretary, Shaun Donovan, has a stronger background in multifamily, and as FHA is integral to then continued flow of housing finance capital.  Roughly a month ago, I posted about the declining FHA loan reserves; at the same, HUD Secretary Donovan said there was a better than even chance of staying above the 2% capital ratio statutorily required.  That, however, is less significant than it may seem, since, as I noted then:

 

The Federal Housing Administration is the original government lender and hence the precursor to Fannie Mae and Freddie Mac; as a forerunner, FHA’s government connection was and is more direct.  It’s an arm of HUD, hence its securities carry the full faith and credit of the United States.

 

Nevertheless, if it proves true that FHA’s loan book goes sour – badly sour – then the government will be further on the hook.  Worse still, the World Bank could stop lending without calamity ensuing; FHA basically cannot. 

 

Maybe we shouldn’t have braked so hard

 

The government is giving as many people as it possibly can the chance to buy a house or, if they are in financial difficulty, refinance it. The FHA is insuring about 6,000 loans a day, four times the amount in 2006. Its portfolio is growing so fast that even FHA backers express amazement.

 

I don’t understand the Times’s phrasing there – what does being an FHA backer have to do with observing that its activity growth is a remarkable byproduct of our remarkable times?

 

Many Democrats insist the FHA is playing a vital role in the housing market, which is only just starting to stabilize.

 

Would that elected officials and journalists could refrain from politicizing what should be bipartisan evaluations of entity performance and importance.

 

“FHA has stepped into the void left by the private market,” Representative Maxine Waters, Democrat from California, said at the hearing. “Let’s be clear; without FHA, there would be no mortgage market right now.”

 

Together with Fannie and Freddie, FHA is the credit backstop for about 80% of all US residential lending right now.  While it’s terrifying to think of that much lending being concentrated behind the government, it’s more terrifying to think of any one of the three stopping cold.

 

No more lending?

 

But [Stevens] acknowledged that some 20% of FHA loans insured last year — and as many as 24% of those from 2007 — faced serious problems including foreclosure, offering a preview of a forthcoming audit of the agency’s finances.

 

This shouldn’t be entirely surprising, recognizing that in 2008 FHA was the lender of last resort, and as we have chronicled, many of these refinancings were done hopefully.

 

“Let me simply state at the outset that based on current projections, absent any catastrophic home price decline, FHA will not need to ask Congress and the American taxpayer for extraordinary assistance — we will not need a bailout,” Mr. Stevens said in his testimony.

 

That is a direct and clear statement.  Let’s hope it’s true. 

 

If I’m wrong, strike me dead

 

Conversely, Mr. Zoellick wants money so he can reopen for new business. 

 

Zoellick conceded that such a task [Raising money from member nations – Ed.] was likely to be extremely difficult, given the difficulties facing countries in the wake of the developed world’s biggest recession since the Second World War.

 

Said in plain English, when you’re worried about domestic lending to your own homeowners, you’re highly unlikely to ship precious capital overseas to facilitate lending to foreign homeowners.

 

Make no mistake: we have reason to be watchful.

 

Superhero Sentry at your service

 

[Continued tomorrow in Part 2.]

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