When Federal Reserve Chairman Ben Bernanke recently raised the notion that the recession was ‘very likely over,’ no one began whistling ‘Happy Days Are Here Again.’ If anything, the financial drama appears to be getting darker, as two of the federal agencies that are responsible for holding up the economy are beginning to show significant evidence of acute stress.
The Federal Housing Administration (FHA) and the Federal Deposit Insurance Corp. (FDIC) are experiencing unprecedented difficulties. While both agencies are keeping stiff upper lips about their respective problems, it is becoming evident that outside assistance in the form of taxpayer dollars is going to happen at some point in the near future.
The FHA raised a red flag last week when it became clear that its loss reserves will register below the congressionally mandated 2% threshold when the next fiscal year begins in October. FHA Commissioner David H. Stevens insists that the agency won't require a bailout, but it is not clear how the agency is going to regain financial strength in view of the current climate.
As for the FDIC, the agency has quietly approached the nation's major banks to borrow billions of dollars to shore up its dwindling reserves. The FDIC's fund is at its lowest level since 1992, and the rising number of failing banks promises to create additional headaches. If this ‘Brother, can you spare a billion?’ plan is inadequate to meet the FDIC's needs, the agency also has the option to impose emergency fees on its banks or take advantage of a $100 billion U.S. Treasury-based credit line.
The twin problems here cannot bode well for the recovery of the economy or the mortgage banking industry. Bailout funds being thrown at the FHA and FDIC will dilute the chances for massive federal intervention in the warehouse lending sector – and it appears that federal input is the only immediately feasible solution to that crisis, since the private sector is not rising to the challenge.
New bailout funds being diverted to the FHA and the FDIC will also slow whatever progress is being made in bringing Fannie Mae and Freddie Mac out of conservatorship. The federal government's attention should be focused on getting the government-sponsored enterprises back on their toes, instead of preventing other agencies from falling on their faces.
Furthermore, a new round of bailouts will encourage Congress to think twice about the Obama administration's proposed Consumer Financial Protection Agency, which is supposed to serve as something of a mega-regulator. After all, who is going to pay for the creation of a brand new agency – particularly when there is no shortage of existing agencies with lethal health problems?
In regard to the FDIC, the notion of having the agency hit banks with an emergency fee is galling – particularly to the well-run and still-thriving community banks that were not responsible for any of this mess. And don't be surprised if the general public panics over the possibility of the FDIC fund going broke.
Of course, there is the possibility that neither the FHA nor the FDIC will require any bailout funds. But that seems like a very remote possibility, considering that the only sign of a return to normalcy is Bernanke's aforementioned observation that the recession is ‘very likely over.’ But even if the recession is over from a data-driven standpoint, the reality remains that the tumult has not been firmly tucked into the history books.
What is your opinion? Feel free to share your comments here or e-mail me with your thoughts.
– Phil Hall, editor, [b][i]Secondary Marketing Executive[/i][/b].
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