Housing and Banking Woes to Continue

The FHA is running on empty. The FDIC approves the pre-pay plan to build its Deposit insurance Fund. The Housing and Banking Indices remain a drag on the economy and markets.

The US Federal Housing Administration (FHA) will likely join Fannie (FNM) and Freddie (FRE) as a ward of US tax payers. The FHA’s excess reserves available to cover losses have fallen to 0.53% of the agency’s book of business at the end of Q3 2009. This is down from 3% year over year. The cushion mandated by Congress is 2%, so the health of the FHA is a huge Red flag for the housing market and tax payers.

If the FHA needs an appropriation from Congress it would be the first time in its 75-year history. Since they are an arm of the US government the Treasury would have no choice but to rebuild its reserves.

The FHA insures mortgages for eligible borrowers, and its business has increased to meet demand as private-sector lenders have pulled back during the housing downturn. Rising defaults on FHA loans will mean that a taxpayer bailout will be needed. Defaults on FHA backed loans reached 8.24% in September, up from 8.1% in August and 6.1% one year ago.

As a result of this stress, the FHA is tightening its lending standards, which is another drag on housing.

The total take from the banking system is $45 billion. This is a bad decision as banks struggle with increasing bad loans. Remember that more than 3,000 banks are overexposed to C&D and CRE loans.

Today is Bank Failure Friday and banks are failing at a faster pace of the past seventeen years. In the first half of 2009 the FDIC closed 45 banks, which cost the Deposit Insurance Fund $12.5 billion.

In the second half of 2009 through November 6, the FDIC closed 75 banks, which cost the Deposit Insurance Fund another $19.8 billion.

As the FDIC awaits the $45 billion in three year prepaid fees due at year end, I estimate that the Deposit Insurance Fund is in arrears by $9.4 billion.

Meanwhile the banks strapped to make these payments will reduce lending, and will become more vulnerable for failure.

My idea is to simply turn over the remaining $210 billion in TARP funds to the FDIC and credit the money to the Deposit Insurance Fund. This would take the fund back above the 1.15% ratio of insured deposits, which is required by June 2013. On June 30 the ratio was a paltry 0.22%.

I would rather see the FDIC tap its temporary $500 billion line of credit with the US Treasury than tap struggling member banks.

The Housing Sector Index (^HGX) failed at its 50-day simple moving average the past two days at 102.67. This indicates risk to the 200-day at 88.67. Charts courtesy of Thomson / Reuters

The America’s Community Bankers Index (^ABAQ) stayed below its 50-day and 200-day simple moving averages at 143.31 and 146.82.

The Regional Bankers Index (^BKX) stayed below 21-day and 50-day simple moving averages at 44.57 and 45.82 this week with the 200-day as support at 37.34.