Oncoming Train

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With the Obama gang set for a 2010 deficit of $1.6 trillion, the public has become accustomed to seeing the usual corrupt losers – Fannie Mae, Freddie Mac, GM, Chrysler, and the like – sucking the taxpayer’s tit for all its worth. But there are two more massive bailouts looming that have so far escaped public notice.

The first is pointed out by Allan Sloan on CNNMoney.com (Feb. 4). He notes that the Social Security system this year will be paying out in benefits more than it collects in taxes. This has not been announced by the Social Security Administration because the negative cash flow is hidden by an accounting gimmick.

As Sloan found when he looked at the actual numbers in the updated budget, just put out by the CBO, there appears a modest Social Security surplus of $92 billion. But Social Security gets that figure by adding in $120 billion “interest income” from its so-called “trust fund.” That fund is an accounting fiction; it is just the accumulated amount of past surpluses that the government spent for various things. So the interest is just an accounting gimmick, too: it is money that the government will have to payout to cover ongoing Social Security outlays.

In short, Social Security is facing a deficit of $28 billion, going negative much earlier than officially predicted. This is the first time there has been a deficit since the early 1980s, when Congress was forced to lower benefits and raise both eligibility ages and payrOll taxes.

Looking at the CBO estimates, Sloan notes that the def- icit will shrink to almost break-even (unless the economy dips into recession again) during the next few years, before it really starts to grow because of the mass retirement of the baby boomers.

He concludes, “This year’s Social Security cash shortfall is a watershed event. Until this year, Social Security was a problem for the future. Now it’s a problem for the present.”

We turn next to a little-discussed federal agency that (like Freddy Mac and Fannie Mae) was set up by the government to facilitate home purchases: the Federal Housing Administration. As an article in The Wall Street Journal (Jan. 19) details, the FHA is headed down the same sewer that Freddie and Fannie disappeared into.

The FHA was set up in 1934 to help first-time home buyers. While it doesn’t give loans or buy them, it backs them up; it insures them against default, and charges the lending companies a fee.

For many years, it represented a small part of the housing market, hitting a low of 2%, in 2006. Then the subprime mortgage meltdown hit, and in the face of plummeting housing values and a dry credit market, politicians started putting the screws to the agency to loosen its standards. The agency quickly complied.

The FHA started to refinance high-risk borrowers, put- ting them in fixed-rate mortgages. In 2008, Congress “temporarily” allowed the maximum loan amount the FHA could guarantee to rise from $362,790 to an astonishing $729,750 – over double! The main driving force behind this increase is the same buffoon, Rep. Barney Frank (D-MA), who shielded Freddie and Fannie from any scrutiny until they exploded. (He actually pushed for the limit to be $800,00m)

Understand, the FHA only requires a laughable 3.5% down to begin with. But it started allowing “nonprofit groups” (funded by homebuilders, among others) to give the down payments to borrowers who couldn’t even manage that 3.5%.

The resulting growth was predictable. By the third quarter of 2008, the FHA was insuring 25%, of all mortgages. In the areas most affected by the housing slump, it is insuring half of all new loans. It now explicitly backs – with taxpayer money – over $685 billion in loans, many written under the dicey new standards.

Also predictable was the looming tidal wave of bad loans that the FHA will have to cover. At the 30 biggest FHA backed lenders, 12%, of the loans are already in default only two years after being written; that’s double the national rate. And an independent audit shows that the agency is rapidly nearing the point at which it won’t have enough cash reserves to cover its losses. The FHA says it has enough reserves to cover losses, but not if housing prices take another tumble.

People in the housing industry see what’s happening quite clearly. One industry consultant told a congressional panel, “FHA is, at best, running on empty, and probably is facing a negative capital situation.” Robert Toll, CEO of the huge development firm Toll Brothers, Inc., was blunter: he described the FHA as “a definite train wreck,” saying that it will be the next subprime mess.

The recently appointed head of the FHA, David Stevens, was outraged at Toll’s remarks, calling them “ludicrous.” But one has a right to be skeptical. Stevens’ position in the industry is that of the biggest seller of adjustable rate mortgages for World Savings back in the 1980s, before moving on to hold a top job at – Freddie Mac!

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