Whitney Tilson passes on this chart, showing delinquencies at the FHA. He notes that the FHA is a crucial source of support for the housing market right now, providing a whopping 23% of all mortgages. If you have a subprime credit rating of 600, you only need to put 3.5% down to get an FHA loan; even if you have a positively wrecked credit rating of 500, you can still get a mortgage with only a 10% downpayment. And the people brokering a lot of these loans are often the selfsame shady characters who represented the worst face of the subprime bubble.The FHA took over the subprime mortgage business. The government's now on the hook for nearly a quarter of all mortgages in the country through the FHA. They basically took over all the bad Fannie and Freddie subprime mortgages. The coming collapse of the FHA is one of the major reasons why the stock indexes are not a true tale of the economy. When the FHA goes under, it will cost hundreds of billions if not trillions to bail it out. We don't have that kind of money right now.
How high will the 2008-vintage delinquency rates eventually go? That’s the crucial question, since those mortgages represent more than 20% of the entire FHA portfolio. They’re already high, at 19.4%, but they could go much higher, given that the 2007-vintage loans are over 30%.
We’ve seen this movie before; we know how it ends. There’s going to be an FHA bailout, and it’s going to be big. The only question at this point is just how big it’s going to be.
But we'll still have to pay for it. The only lesson learned from the financial meltdown of 2008 is that Too Big To Fail will always be bailed out. The FHA is no different.
Tick. Tick. Boom.