Let's cut the crap here with the claims that the "FHA is making sound loans:"

The idea the FHA needs a rescue is “just plain wrong,” Stevens said in an Oct. 6 letter to the Wall Street Journal. That’s in part because the FHA’s accounting method mean its reserves are enough to cover more than 30 years of projected losses, assuming no revenue from new business, he said.

This is just plain pump-monkey nonsense.

FHA currently requires 3.5% down.  Remember that (contrary to the Realtard's assertions) all home purchases are instantly underwater by approximately 8% from their "purchase price" at closing, because typical Realtor commissions are 6% and closing costs, including title transfer, title insurance and doc stamps typically consume about 2% of the deal price.  A home that must be immediately resold thus instantly "consumes" about 8% of the purchase price, and this deficiency persists over time, rising market or not.

As such FHA loans are all immediately in negative equity at closing.  If delinquency is running at 14% (which is 60 day+ only), or 22.9% (if you include 30 day lates) the fact remains that in order for the FHA to be "solvent" those problems must all occur after the loans go into positive equity status.

Now one can argue that with conservative loan-to-value ratios the FHA won't lose its shirt.   But even there the borrowers will unless the debt-to-income numbers are similarly conservative, and they are not, as I have previously documented.  Indeed, in that particular loan I documented which did in fact fund the FHA was unlikely to take a loss (LTV under 70%) yet the borrower's debt to income was fifty-three percent - and that's on gross income, meaning pre-tax.  The odds of that loan being sustainable and not resulting in the loss of the home for the borrower?  Almost zero.

So we have two problems here and yet the Realtor and FHA proponents don't want to talk about either.  The first is that for FHA-funded purchases the 3.5% down payment results in a LTV of 96.5%, rendering the property and loan instantly upside down by roughly 5% at closing.  Since the principal payments are near zero in all mortgages for the first few years a default in the first couple of years after origination will result in the FHA realizing an actual loss.  If prices continue to decline those losses will, as a percentage of loan value, become ridiculously large in a huge hurry.

In the second case, where refinances are taking place at reasonable LTVs (not the "streamline" refinances that are now authorized at up to 125%!) the FHA may not be exposed but the borrower sure is.

The FHA's claim that it is practicing "conservative" underwriting is both a bad joke and a flat lie.  Jeff Skilling went to prison for trying to run this sort of accounting at ENRON, yet we still have "government officials" doing the same thing at federal agencies.

Back end "debt to income" ratios (DTIs) must be cut back to no higher than 36%, and CLTVs post-closing must be limited to 95%.  For FHA loans this mandates a roughly 10% down payment, and refinances must be denied where post-closing, inclusive of all costs, the CLTV is over 90%.

If the government wants to provide "rescue" financing for underwater (or "about to reset/recast") homeowners then they must force the original originating and/or securitizing bank to accept the writedown of principal to where these CLTVs are achieved - even if it bankrupts them.