A federal agency that insured more than half of all loans for first-time homebuyers last year may soon look to taxpayers to shore up its dwindling finances.
Throughout its 78-year history, the Federal Housing Administration has paid for itself through upfront and annual mortgage insurance premiums charged to borrowers. But next week the agency will issue an independent financial audit that may set the stage for the FHA’s first-ever draw from the U.S. Treasury, Bloomberg reports.
The FHA has been hard-hit by defaults from loans made from 2005 and 2008 and has taken steps to strengthen its capital reserves, including raising mortgage insurance premiums three times in 2010 and again this year. The agency has also tightened credit standards and prohibited seller funding of buyer down payments, a practice the agency estimates will cost it $14 billion on loans issued before 2009.
As of June 30, 25.8 percent of FHA’s 2007 loans, 24.9 percent of its 2008 loans, and 12.2 percent of its 2009 loans were seriously delinquent, according to the Wall Street Journal.
While loans made in subsequent years have been of higher quality, new income from those loans may not outweigh the losses from the previous housing bubble-era loans, Bloomberg said, citing anonymous sources.
In last year’s annual report, the FHA noted its capital reserve ratio, which measures reserves in excess of what’s needed to cover projected losses over the next 30 years, had dropped to 0.24 percent from 0.5 percent in 2010. But an expected recovery in home prices prompted the agency to project capital reserves would return to a congressionally mandated 2 percent ratio by 2014.
This year’s report may be more pessimistic than last year’s because of changes in its economic modeling, lower expectations for home prices, and a revised assessment of loans from earlier years that have been refinanced more recently, Bloomberg said.
The FHA has repeatedly said it will not require a taxpayer bailout. The National Association of Realtors has supported that stance, and urged Congress not to take steps that might discourage homebuyers, such as raising FHA minimum down payment requirements.
Earlier this year, the FHA got some breathing room after receiving a one-time payment of almost $1 billion from a $25 billion national mortgage settlement with the nation’s five biggest servicers.
The government has since sued one of the servicers, Wells Fargo, for "hundreds of millions of dollars" due to alleged "reckless origination and underwriting of its retail FHA loans over the course of more than four years, from May 2001 through October 2005." The bank claims that the lawsuit violates the terms of the $25 billion settlement and has asked a federal judge to throw the case out.
In a report released last month, the Center for American Progress, a research organization Bloomberg says is aligned with Democrats, says the FHA’s falling capital reserve ratio is a "legitimate concern" but notes the fund still has $21.9 billion in its financing account to cover all of its expected insurance claims over the next 30 years, and the fund’s capital account has an additional $9.8 billion to cover any unexpected losses.
"That’s not enough to meet the 2 percent capital ratio target, but the agency still has plenty of cash on hand to cover its insurance liabilities based on reasonable expectations in the housing market — and even has some extra money set aside for a rainy day," the report said.
Nonetheless, should the recovery stall and home prices begin to decline, the FHA may need "temporary support" from the Treasury, the report said.
"This support would kick in automatically — it’s always been part of Congress’ agreement with the agency, dating back to the 1930s — and would amount to a tiny fraction of the agency’s portfolio," the report said.
"It would also be a bargain, considering how taxpayers have benefited from the agency over the past eight decades — and especially the past four years."
Three to four years ago, the FHA stepped in when the private housing market was collapsing, and, as a result, since then between 3 million and 4 million families have been able to buy a home and another 2 million have been able to refinance through the FHA program, according to Carol Galante, acting FHA commissioner and assistant secretary for housing, speaking at a housing forum hosted by Zillow and the University of Southern California’s Lusk Center for Real Estate last month.
Citing Moody’s economist Mark Zandi, she said if FHA lending had not expanded when it did, the housing market would have cratered and taken the economy with it.
Today, the FHA guarantees about 15 percent of all U.S. mortgages and insures about 7.6 million loans with total outstanding balances near $1.1 trillion, triple the amount it backed five years ago, Bloomberg said.