Dienstag, September 29, 2009

More Gas on the Fire...

The fire being the continuing increase in sub-prime defaults - now up to 41% of total sub-prime lending - and the gasoline being the commitment of the US government to hoping that the problem will simply go away.

Read this and fear the default of the FHA.

It's not so much a question of if, but more a question of when: given the very considerable number of subprimes that are heading towards official default - but aren't quite there yet - there is going to be a huge amount of housing that has to come on to the market to cover losses. Dump properties on the market and prices will continue to fall.

Leveraged out at 50:1, with 25% of all new mortgages covered by the FHA (which is probably the only reason that they were given!), and with defaults in most recent loans climbing rapidly, and given the mere 3.5% downpayment requirement that the FHA states, this is the creation of a perfect storm.

Right now, between the FHA, the Fannies and the VA, the US government now guarantees repayment on something like 80% of all US mortgages.

Wonderful: what that really means is that the US government is betting that prices will recover, and recover soon so that their portfolio can be moved on the open market ASAP.

What if, however, prices fail to recover?

Then the US taxpayer is left holding the debt, as it guarantees repayment.

If anything, this is a massive win for the mortgage industry, the builders of homes and the service industries associated. They can continue business as normal, as the government is guaranteeing that their cash flow will proceed uninterrupted, regardless of what happens.

Does the US taxpayer even know that they are heading for another perfect storm of default and debt?

The irresponsibility of the Obama Administration is increasingly apparent if you bother to take a look: in order to avoid having to admit that a keystone of American politics - that people who can't afford houses should buy nonetheless - is, fundamentally, toxic to the entire system.

They remain stuck on stupid.

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