FHA Now Insures 1 in 4 US Mortgages

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18 October 2009 :: J.E. Robertson

The Federal Housing Authority (FHA) used to insure one in fifty US mortgages; now FHA insures one in four. The financial crisis allowed the most reckless banks to shift their losses to the American taxpayer. Rep. Marcy Kaptur, a Democrat of Toledo, Ohio, serving her 14th term in the House of Representatives, called the 2008 financial crisis and ensuing bailouts the biggest transfer of wealth in history from the American people to the nation’s biggest banks.

Kaptur also recently told PBS’ Bill Moyers Journal that the FBI is suffering from a major lack of funding and staffing for serious financial fraud investigation. Part of what allowed for such massive misbehavior and even outright predatory lending is tat, beyond a lack of regulatory oversight, federal banking and insurance criminal fraud investigators were marginalized in recent years as Bureau funding was directed increasingly toward terrorism investigation and domestic intellience operations.

The failure to aggressively regulate financial markets, especially to assess the specific unique qualities of “innovative” financial instruments —like adjustable-rate-mortgage derivatives, credit default swaps, reliant on often non-existent wealth, intramural lending schemes and the subversion of required cash-in-reserve holdings—, created a climate of “lawlessness” according to many economists and banking industry watchers in which top executives, leading regulators and Congressional watchdogs alike were unable to understand the nature of the holdings being traded or adequately measure their impact on long-term bank solvency.

Now, with the economy still limping, and millions out of work and/or facing bankruptcy, with hundreds of billions of dollars in consumer debt unpayable, foreclosures are still hitting new all-time highs, and the FHA is being forced to back up loans that neither lender nor borrower can afford to keep up. The vast expansion of FHA’s mortgage portfolio is a sign of weakness in the banking sector and in sustainable household wealth or consumer-spending potential.

Housing recovery, with it’s attendant generation of new credit and expanding wealth, drives the return of the broader economy to growth and generalized prosperity. With states like Kaptur’s own state of Ohio experiencing a 94% increase in foreclosures, the process of recovery is being directly and severely threatened. Incidentally, Republican House minority leader John Boehne is also from Ohio, and his opposition to some key components of Pres. Obama’s financial regulatory reforms, that would help rescue and protect consumers from failing loans could pit off his state’s recovery.

Bailouts have focused on major banks and Wall Street firms as the “engines of economic growth”, because the freedom of consumers to spend had come to rely so heavily on those firms’ investment strategies. But baikout lending is not stimulative, because the main focus is to simply avoid the collapse of banking institutions, some of which were so deeply imperiled by their involvement in questionable lending practices and the derivatives that emerged from them that we’re really talking about a process aimed at reversing many years’ worth of flawed accounting and unsustainable corrosive practices.

The last payment for the bailout of the banks that were affected by the 1980s savings and loan crisis will be paid in 2013. Massive lending to private financial interests costs money over time, as interest accumulates, but some would argue this is good for the taxpayer, whose fund —the federal budget— actually expands its revenues through loan repayment. Will that happen thus time around? Maybe, but first comes the trick of dealing with what happens when the bailed-out banks refuse to lend the money they’ve drawn from the taxpayer. Essentially, money is taken out of circulation in order for banks to restore their capital reserves, but in the meantime, everything dependent on credit —in the US economy if the 2000s, everything— stagnates, until the cash economy re-emerges.

Financial regulatory reform depends on recuperating the fundamental constraints of Glass-Stiegel, which was repealed in 1998, and which kept investment banking and commercial banking separate, to prevent conflicts of interest and wild experimentation with unjustifiable claims of windfall investment potential.

As White House chief of staff Rahm Emanuel told CNN’s John King, incomes are at an 18-year low and healthcare costs are projected to increase by at least 10% next year if meaningful reforms are not quickly implemented. While Wall Street’s firms are clearly enjoying a substantial upsurge in revenues and have repaid much of their bailout borrowing, life on Main Street, USA, is tight, and capital, real or imagined, is hard to come by.

The best way to reverse that trend is to make it possible to base relationships between banks and consumers on real wealth calculations and the principle that credit relationships need to be beneficial to and sustainable for BOTH parties. FHA is making very clear where the weak spots remain, illustrating that falling property values, job losses and near punitive “corrective” actions taken by many banks are driving previously non-risky mortgages into foreclosure. Banking reform means financial regulatory reform, and the housing crisis means it must come soon.