Fannie and Freddie have already gotten their bailouts, and now the third leg of the federal government's affordable home ownership fetish might need more money too: the Federal Housing Administration.

The FHA insures loans for first-time homebuyers, and its obligations could be staggering. The FHA insures loans with down payments as low 3.5%, but given the number of buyers who have wrapped closing costs into their mortgages in recent years, the true loan-to-value ratios may have been even higher.

Some 10.2% of people who took out FHA loans in first quarter of 2008 missed two consecutive monthly payments within the first ten months. And 12.3% of the loans made in 2007 were seriously delinquent.

Economist Allen Sinai, founder of Decision Economics, Friday underscored a dimension of the financial crisis that appears to be getting short-shrift: namely, that U.S. home foreclosures continue to erode the asset base of the U.S. financial system.

Efforts by the Fed, ECB and other major central banks to keep credit markets supplied with dollars, as well as bank recapitalization efforts, are critical to ending the financial crisis, but they won't achieve their goal if more is not done to get at the root cause of the crisis: mortgage foreclosures, economists generally agree.

As Sinai and BloggingStocks' Peter Cohan have noted, home foreclosures are the source of the bad bond problem -- at once both turning selected mortgage backed securities to notes barely worth the paper they're printed on and also weakening banks' balance sheets.

FHA, others must move 'at full-speed on refinances'

Further, economist Richard Felson said it's time for federal officials, in the Federal Housing Authority, Fannie Mae (NYSE: FNM), and Freddie Mac (NYSE: FRE) to "move at full-speed and get as many at-risk mortgages refinanced at lower, fixed rates."

With the U.S. Senate expected to debate and vote on a revised bailout/rescue bill in the next day or so (famous last words), two revisions the world's greatest deliberative body should incorporate are bank recapitalization options and funding to refinance mortgages, economists say.

BloggingStocks' Peter Cohan has written extensively on the need to recapitalize banks, and economist Richard Felson concurs. However, Felson argued that the revised rescue bill should give banks and other institutions the option of either offering their distressed/bad debts to the U.S. Treasury in its reverse auction or accepting a mutually agreeable investment by the U.S. Treasury into the institution.

Creating options for stressed banks

"This will give banks more options, and in my view more incentives to participate in the rescue plan. If the plan just contains asset purchase provisions some banks may balk at the prospect of selling some assets at a fire-sale price of 10 cents or 15 cents on the dollar, and that may prevent some distressed assets from being removed from the system, delaying the financial system's recovery," Felson said. "Offering to buy a stake in the bank offers another recapitalization option."

Few economists / analysts would deny that the financial crisis is so complex, with numerous casual factors, that there's more than enough blame to go around: no one party can or should be seen as 'the culprit.' Moreover, what's paramount now is to identify what works, i.e. what helps solve the crisis, and implement it.

The U.S. Congress' bailout / rescue bill (pdf) is one tool: it will help. If it goes reasonably according to plan, the U.S. Treasury, and the companion agencies the rescue creates, will slowly remove distressed / bad assets from the financial system and in the process would both stabilize the credit markets, and equally important, restore confidence in the financial system.

Another tool: mortgage help in the form of refinanced mortgages for homeowners having trouble paying their mortgage / nearing default.

Economist David H. Wang said Congressional Democrats were unsuccessful in their effort to get U.S. bankruptcy laws amended so that judges could adjust the terms of mortgages -- Congressional Republicans were adamantly opposed to it -- but the bailout / rescue package does authorize the U.S. Government to further assist homeowners who face mortgage defaults.

If a vote were held Thursday or Friday, the U.S. Treasury's $700 billion bailout bill would probably pass both chambers of the U.S. Congress, but by narrow margins and with a) an equity stake for U.S. taxpayers for every company that receives assistance, b) a cap on executive compensation, and c) oversight provisions.

Once the bailout work is done, should the U.S. Congress also pass a homeowners assistance bill to help more homeowners with at-risk / burdensome mortgages refinance to secure a lower interest rate?

As BloggingStocks' Jon Berr pointed out Monday, while lawmakers (and no doubt taxpayers) do not want to reward housing speculators, there's a large pool of borrowers who will be able to pay their mortgages if they can get out of high interest rate notes, and other burdensome adjustable rate mortgages, and refinance at a low, 30-year fixed rate.

While it's true the U.S. Government and taxpayers would end up subsidizing refinanced mortgages if the government receives interest that's less than it could by investing the money elsewhere, the costs of foreclosure - leading to bond defaults - leading to banking institution stress / systemic stress will undoubtedly be far greater, so says economist David H. Wang.

The U.S. Government's decision Friday to put in place a sweeping program to buy distressed/bad debt to stabilize the financial markets will likely represent the biggest intervention of the federal government into the private sector since The Great Depression of the 1930s. But not everyone is convinced the action is destined to add hundreds of billions to the taxpayer's bill.

U.S. Rep. Barney Frank, D-Massachusetts, is chairman of one committee that will review the U.S. Treasury's/U.S. Federal Reserve's plan, the House Financial Services Committee. He believes the plan will cost taxpayers "ultimately not a great deal. The Treasury will buy selectively," Bloomberg News reported Friday.

Frank added that the bad debt will cost "maybe double-figure billions over a few years. The government will sell the assets back," he said, Bloomberg News reported.

Frank's forecast realistic or optimistic?

Is U.S. Rep. Frank's cost estimate realistic or very optimistic? Economist David H. Wang told BloggingStocks Friday that depends on several factors.

"On the one hand, if we have a two-year period of economic stagnation, the government could end up with hundreds of billions of dollars of extremely-low-grade bonds, bonds that they may only be able to recoup the equivalent of 20 cents or 10 cents on the dollar," Wang said. "Some bonds would be written-off, others reconfigured and perhaps grouped with other investments, with the housing that backs them perhaps converted to other uses."

"On the other hand, if the government intervention broadens the conforming loan category of both Fannie Mae and Freddie Mac, as the legislation is expected to do, this will enable more 'somewhat-risky' mortgage bonds to be purchased, providing even more liquidity," Wang said. "And if the FHA [Federal Housing Administration] also receives more money to refinance mortgages at a lower rate, this will help check the high level of foreclosures."

"Under the latter scenario, net government outlays would be considerably less," Wang said. "Essentially, the issue is this: can the government maintain financial market liquidity, ease risky bonds out of the system, and reduce foreclosures with this plan? Not a simple task, but it is possible, over years."

The head of the Senate Banking Committee has indicated that the U.S. Federal Reserve has the authority to create a new 'debt fund' to buy, warehouse and dispose of distressed / bad debt resulting from the subprime mortgage crisis.

"The Fed has the authority to move in this area," U.S. Sen. Chris Dodd, D-Connecticut and chairman of the committee, told Bloomberg News.

Many economists and analysts argue that a step integral to stemming the cycle of foreclosure / housing price decline / bad bonds / stock run / collateral call / bankruptcy is for a special agency to buy up and strategically restructure, then sell, distressed / bad assets. Economist Peter Dawson is one of those economists who favors the tool.

"Ideally, you'd like to have a private-sector consortium of banks or other financial institutions to coordinate the effort, but right now there aren't exactly a lot of banks stepping up to the plate to take a swing," Dawson told BloggingStocks Thursday. "There's a considerable amount of fear in the market, frankly, and banks are hoarding cash. If this remains the case then we'll need a public sector effort to put this new institution in place."

Confidence in the global economy fell in September, as concern mounted about the health of the U.S. economy and global financial system following the bankruptcy of Lehman Brothers and the near bankruptcy of AIG, which prompted a U.S. Federal Reserve intervention, a new survey indicated.

The Bloomberg Professional Global Confidence Index fell to 11.3 in September from 14.1 in August among U.S. respondents. The Western European index fell to 12.6 from 12.9. Readings below 50 indicate negative sentiment.

Economist Richard Felson, who did not participate in the Bloomberg survey of 3,000 Bloomberg Terminal users, told BloggingStocks Wednesday too many financial concerns and bankruptcies are occurring over a short period for business professionals to be positive.

"Countrywide, Bear Stearns, Indymac, Freddie, Fannie, Lehman, Merrill, and now AIG. Wow, that's an awful lot for any economic system to absorb in five years, let alone one year," Felson said. "Executives and other business professionals are justifiably concerned about credit access for business operations and about declining demand due to rising unemployment. The major U.S. economic metrics are not moving in a positive direction right now and the nation needs to correct that."

Economists differ regarding whether the U.S. economy has officially fallen into a recession, but for investor Mario Gabelli, the debate is the esoteric stuff of academicians and analysts.

Gabelli has his own reading on the U.S. economy and he isn't opaque about it.

"The consumer has been in a recession since November 2007," Gabelli told Bloomberg News Friday. "The economy has been bolstered by exports and a few other things."

Further, Gabelli, who oversees $28.3 billion as chief executive officer of Gamco Investors, Inc., said the U.S. Congress may have to boost the economy with additional tax rebates, Bloomberg News reported Friday. Congress passed and President Bush signed a $117 billion tax rebate package earlier this year.

Gabelli's comments occurred before the U.S. Labor Department announced Friday that the U.S. economy lost another 84,000 jobs in August, with the unemployment rate rising to 6.1% -- a 5-year high. The U.S. economy has now lost 605,000 jobs in 2008 after creating just 1.1 million in 2007.

Gabelli says takeover of Fannie, Freddie needed

Further, Gabelli said the federal government must take over Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), the U.S.'s largest mortgage financiers, as a prerequisite for housing sector recovery, Bloomberg News reported.

As Washington legislation goes, the housing bailout bill that the U.S. House and Senate passed last week and that President Bush is expected to sign this week, is omnibus in scope and, ultimately, in budget and economic impact.

Economist Glen Langan told BloggingStocks Monday the bill's two key components are the assistance to Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), and a new Federal Housing Administration program. The former, Langan says, "represents an implied guarantee" of Fannie and Freddie by the U.S. Government, which should restore confidence in each, and in the secondary mortgage market. Banks and other mortgage lenders, he said, "will now be more willing to write conforming loans, knowing that Fannie and Freddie will have the funds available to purchase and back these loans."

The latter, a Federal Housing Administration program that enables banks to sell to the U.S. Government mortgages unlikely to be repaid, "will help stem the tide of foreclosures that's plaguing the housing sector," as well as "relieve banks/lenders of less-than-stellar to non-performing assets," Langan said.

Beginning of the end of the housing slump?

Some House and Senate Republicans, and a few Democrats, among others, have chaffed at the bailout bill's cost and ultimate impact on the U.S. taxpayer. House Republican leader U.S. Rep. John Boehner, R-Ohio, told Bloomberg News the bill did not reform Fannie and Freddie enough, and will leave taxpayers with a bill for "billions and billions of dollars." Langan said Rep. Boehner's concern is legitimate.

My Ph.D. adviser David E. RePass, professor emeritus at the University of Connecticut, used to frequently recite an axiom about the U.S. Congress that rings true, regardless of era, or circumstance.

"Congress does not react, unless not reacting will result in the wrath of the American voter."

Well, concerning housing, it looks like Congress sees the wrath of the American voter ahead because the legislative body is starting to react.

Two measures working their way through Congress may ease the housing crisis. The first, a bipartisan Senate measure, is a modest step to address the rise in home foreclosures, The New York Times reported Friday.

U.S. Rep. Barney Frank, D-Massachusetts and Chairman of the House Financial Services Committee, Thursday introduced legislation to enable the Federal Housing Administration to insure and guarantee mortgages that have been written down banks and other mortgage holders, Rep. Frank announced in a statement.

Rep. Frank's proposal would permit the FHA to provide up to $300 billion in loan guarantees which could potentially result in the refinance of 1-2 million at-risk mortgages, preventing foreclosures, "protecting neighborhoods and help stabilize the housing market."

Groucho Marx once remarked that whenever things start to look really dark, remain calm, don't panic, and above all, turn on a light.

Given the barrage of financial stresses battering the credit and equity markets these days, consumers, economists and investors alike could use some of Groucho's levity, and some light. In this case the light may appear in the form of the Federal Housing Administration.

What's old is suddenly new

The Federal Housing Administration, the once-viewed-as-antiquated, irrelevant Great Depression-era government agency, is suddenly emerging as the centerpiece of government efforts to bolster the U.S. housing market, reported The Wall Street Journal (subscription required.)

The FHA has become the cheapest, and in many cases, the only alternative for borrowers who can make only a small down payment, and the agency is rapidly gaining market share.

U.S. home foreclosures reached another record high in Q4 2007, the Mortgage Bankers Association announced.

A record 0.83% of mortgages were entering the foreclosure process in the last three months of 2007, compared to 0.54% for the same period in 2006, the MBA announced.

In addition, the delinquency rate reached 5.82% in Q4 2007 -- the highest level since 1985 -- up from 4.95% in Q4 2006.

With home foreclosures expected to increase in 2008 as the second wave of variable interest rate mortgages reset, an influential member of Congress is expected to introduce legislation that would enable the Federal Housing Administration to buy at-risk loans, enabling them to be refinanced and preventing homeowners from being foreclosed upon, The Financial Times reported Wednesday.

U.S. Congressman Barney Frank, D-Massachusetts and chairman of the House Financial Services Committee, is floating a $15 billion initiative that would authorize the FHA to buy as many as 1 million at-risk mortgages, The FT reported. Some loans, such as those for investment properties and vacation homes, would not be eligible for the program.

The overlooked FHA

Overlooked during the "Roaring 1990s" economic expansion and this decade's housing boom, the Federal Housing Administration is a Depression-era agency that insures loans made to borrowers with poor credit.