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Friday, November 16, 2012

Friday Notes

Industrial production. The note says that Sandy should be about -1% effect, but I don't think it shows up in October. The storm effects begin the 29th, and after that the 30th and the 31st of October. The supply chain effect and most reductions should show up much more in November. Publishing I'll buy, but factories in Ohio weren't affected much in October. 

Anyway, headline is -0.4% for October. The sequence here as we now have it beginning in May is 0.0, 0.0, +0.7 in July, -1.1% in August, +0.2 in Sept, and now -0.4%. Now the July-August swings are really probably due to MV production calendars and SA effects, so the increase in July comes strongly back out of August. In other words, what I'm saying is that this series has been nearly static for months.

FHA report to be released later on fiscal problems and taxpayer bailout required in 2013. 'Cause 13s FHA's lucky number, and when you are talking this much luck, you like to release it on Friday. This is a really interesting story. FHA hadn't published their annual report to Congress, but we can tell what it's going to say by looking at their last quarterly here

There's going to be a lot of nonsense written over this story, but you can cut through it by chanting "cash flow, cash flow, cash flow" to yourself and "Extend & pretend" when you get dizzy. On the quarterly report on internal page 12, external page 13, you will find a handy chart which summarizes cash flow effects. The rolling 4 quarter sequence is (millions)
This is the taxpayer's problem. The predominant reason for this is that all that legal activity that delayed foreclosures delayed FHA claims, so now they are losing their butts.

Additional ugly detail: On new loans, the estimated credit premium is -2.75%, meaning that each poor sucker who gets an FHA loan now pays the insurance fund an average of 2.75% of the insured amount. In short, these innocents are paying for the bling of yesteryear, not to mention all those loan deals announced by an infinitely wise and kind government that's really here to help you. But it's not enough to cover the cash shortfall.

Premiums can't be raised further, because the result would be to make it much cheaper for better quality borrowers to go outside the FHA, which would further drop new loan generation and worsen credit quality. See the chart on internal page 4, external page 5 of new loan generation. That huge 2009 bulge is going to take some time to work off.

The refinance share is now around 40%, meaning that in many cases these are previous FHA buyers who are refinancing to get lower rates. Thus the loan drops out and then returns. That makes it more difficult to build the total base of good loans. Thus, as FHA elegantly explains on external page 15:
The serious delinquency rate held steady at 9.4% this quarter. This level is about 1.4% higher than this time a year ago. Two factors appear to be driving this result. The first is the persistency of loans in 90-day delinquency as lenders attempt to craft workout plans, and persistency of loans in foreclosure processing. The second is that the historically large FY 2009 and FY 2010 books-of-business are at the age where their serious delinquency rates are increasing toward their life-cycle peaks. Because those books are much larger than is the new FY 2011 book, their loan-age seasoning patterns are not offset by the low default rates on recent endorsements.

On internal page 15, external page 16 (I hope you are noting that pattern), you will find a chart showing serious deliquency rates. The current low was 8.18% in Q3 2011. The current quarter is 9.44%. However, seasonally adjusted, that turns to 9.94% This is a new high by a considerable fraction, which fact was not mentioned earlier. 

When the full report is published, it will appear here. The full report includes an independent actuarial evaluation, which is probably going to stress the unfavorables, such as the effect of the streamlined (non-underwritten) refis which are not included in the generic statistics.The actuarial reviews of the MMI (mortgage insurance fund) are published here.


Obviously, the fix is for the Fed to back off on QE and allow mortgage rates to rise, thus improving FHA's profitability on their good loans.

Haha! Just kidding.

FHA only insures, so a rise in mortgage rates won't help it at all.

With declining market share and a whoop-ass pile of losses coming, there is little they can do to improve their position.

Of course in March our Inspired Leader had FHA drop the insurance premium for refis to about half the current purchase money premium, and that did not help. But the drop in rates wasn't enough to make previous borrowers profit on a refi, so.....

A better economy would greatly help FHA's finances!
You are awesome. More posts please. BTW could you drop a line to economic uberbull McBride (aka calculated risk).
Thanks for kind words, Jeff. I am sure CR is on it.


The source of this comment is from ESPN on Friday. Also, Note Obama also noted that he didn't want Lebron to go there just because he said that.

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