Burning the furniture to heat the house

Posted by Michael Hainsworth on November 18, 2009

A warning flag was raised today by America's biggest luxury homebuilder.

Toll Brothers warns the U.S. Federal Housing Authority is creating another crisis in the lending industry. Speaking at a builder's conference sponsored by UBS in New York, CEO Robert Toll issued this claim:

"Yesterday's subprime is today's FHA. It's a definite train wreck and the flag will go up in the next couple of months: Bail us out. Give us more money."

The Federal Housing Authority insures 1-in-5 American mortgages -- with as little as 3.5-percent down. The FHA's insurance reserve ratio is at the lowest level in history: 0.53 percent. It's legally mandated to maintain a ratio of at least 2 percent to protect the insurance fund from default. And more than 8 out of every 100 loans it insures were in default as of September. The homebuilding industry is being warned that more steps are needed to shore-up the agency.

Toll Brothers has good reason to keep an eye on the FHA. Around 8 percent of the mortgages the builder closed in the past quarter were under the federal banner. Toll Brothers stock is up 19 percent since this time last year -- but still down 30 percent over the last three years.

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