It seems the next large government program that is going to suck our tax dollars dry is going to be the Federal Housing Administration. Welcome to the FHA bailout, it’s coming. The FHA guarantees many mortgages for folks who might not be able to get loans otherwise without normal down payments (usually 10%).

Barney Frank 1

Barney Frank

David Stevens, who testified in front of Congress this week, tried to tell lawmakers that the agency would not need any bailout, but many feel that he is just underestimating the problem.

Here are some of the facts about FHA loans: Last year 20% (and 24% from 2007) are facing foreclosure and bankruptcy. Right now 410,916 FHA mortgage holders are in default, up 76% from last year, which was a horrific year as well. To make things worse the housing market does not seem to be picking up, despite the desperate wishes of lawmakers. In fact, Edward Pinto, who was the chief credit officer for Fannie Mae, thinks that because of these large losses it would almost certainly wipe out the agency’s $30 billion cash reserves. Ouch. That’s $30 billion that we the public will be on the hook for, and guess who’s going to pay for large cash infusions back into FHA once their funds are all gone? Yep, the taxpayer.

In what could be one of the dumbest things ever uttered by a human being, genius Barney Frank said he thinks all the defaults are a good thing;

“I don’t think it’s a bad thing that the bad loans occurred,” he said. “It was an effort to keep prices from falling too fast. That’s a policy.”

Yeah, it’s a policy, but a dumb one. Essentially your “policy” was to give loans to people who had very poor chances of actually ever repaying those loans, thus starting a death-spiral that led to the economic situation we are in. While there were several contributing factors to our current economic woes, the biggest factor was the fact that too many people got mortgage loans for houses they should have never gotten, and qualified for amounts they should have never qualified for and didn’t use the traditional 10% downpayment like they should have. Just so everyone is clear, the reason banks traditionally required 10% down is so that the owner felt they had some stake in deal, otherwise they can just default on the loan at any point and not really feel any pain. Essentially FHA and their 3.5% downpayment requirement enabled many of these bad lending practices, which lead to TARP and the economic collapse. This was all encouraged by Democratic low income housing policy, championed by people like Chris Dodd and Barney Frank. So, yes Mr. Frank, it is policy, but ridiculous policy that only an economic illiterate would think is actually a good thing.