The Federal Housing Administration will likely need a $943 million taxpayer bailout in the next fiscal year to cover losses stemming from defaults on loans made both during and after the housing boom, according to a 2014 budget proposal released by the Obama administration today.
If required, the bailout would be the first in the federal agency’s 79-year history. The FHA has been hard-hit by defaults from housing bubble-era loans made from 2005 through 2008, with future losses estimated at $70 billion for loans made in 2007, 2008 and 2009 alone.
The agency has until Sept. 30 to decide whether it will need a cash subsidy from the U.S. Treasury. FHA Commissioner Carol Galante said the agency still might be able to avoid taking the bailout, Reuters reported.
“FHA, while still under stress from legacy loans, has made significant progress and is on a sound fiscal path forward,” Galante said.
In its last annual report, released in November, the U.S. Department of Housing and Urban Development (HUD), of which FHA is a part, reported a $16.3 billion deficit for the agency, raising the specter of a taxpayer bailout. Since then, the agency has taken several steps to bolster its capital reserves, including tightening underwriting standards, raising insurance premiums, and shuttering FHA’s standard reverse mortgage program.
In testifying today before the U.S. House Financial Services Subcommittee on Insurance, Housing and Community Opportunity, National Association of Realtors President Gary Thomas applauded the FHA for taking steps to improve its financial stability.
“These changes combined with an improving national economy and rising home prices will surely help stabilize the fund so that FHA can continue to serve the needs of hardworking American families who wish to purchase a home,” he said.
He credited the FHA for stepping in when private lenders fled the market and thereby preventing home prices from dropping an estimated 25 percent further.
“FHA did not offer risky mortgage products. FHA did not engage in exotic underwriting. FHA did not have accounting problems or other unscrupulous behavior. Instead, FHA stepped in during our housing crisis, and provided access to mortgage credit to millions of responsible Americans who wanted to purchase homes,” Thomas said.
“Many of the mortgages FHA entered into during the crisis were in declining markets. Lending in declining markets increases risk. However, had FHA not stepped in to fill that market void, our economy would still be far from recovered.”
NAR recommended additional reforms to FHA, mainly centered around giving the agency more freedom, including emergency authority, to make changes to protect its reserves. The trade group suggested FHA have greater flexibility to set premiums and change loan policies, citing losses the agency racked up when Congress would not allow it to discontinue seller-funded downpayment assistance.
“We believe FHA should have to go through some public notice process for significant changes, but don’t believe the agency should have to go to Congress for every program change,” Thomas said.
The trade group also endorsed risk-based premium pricing for FHA-backed loans, improved enforcement and oversight of lenders, and the elimination of the owner-occupancy ratio requirement for FHA condo mortgages.
The administration’s budget proposal projects FHA will insure $178 billion in mortgage loans in 2014, including new purchase loans and refinancings.
The proposal has other implications for housing. It suggests reducing the value of itemized deductions, the mortgage interest deduction included. High-income taxpayers (the top three percent) would be able to reduce their tax liability to a maximum of 28 percent. Right now, there are three tax brackets above that threshold.
“Currently, a millionaire who contributes to charity or deducts a dollar of mortgage interest enjoys a deduction that is more than twice as generous as that for a middle-class family,” the proposal said.
“The proposed limitation would return the deduction rate to the level it was at the end of the Reagan Administration,” the proposal added.
The proposed budget for HUD asks for $47.6 billion, up 9.7 percent, or $4.2 billion above the 2012 level. More than 90 percent of the increase will be used to maintain current levels of rental and homelessness assistance for low-income families, HUD said.
The budget includes $37.4 billion in rental housing assistance to more than 5.4 million families; $18 billion for neighborhood stabilization, including reducing blight in communities hit hard by the foreclosure crisis; nearly $2.4 billion in homeless assistance grants; $400 million to revitalize 30 high-poverty neighborhoods; $526 million for rental assistance and to produce about 4,100 new supportive housing units for the elderly or disabled; $726 million for the housing needs of Native American tribes; $332 million for a housing program for people with AIDS; and $1 billion to the Housing Trust Fund for extremely low income families.
The proposal reduced funding for the HOME Investment Partnerships Program by 5 percent to $950 million. At that funding level, the program will provide grants to state and local governments to provide nearly 40,000 additional units of affordable housing for low-income families, the proposal said.
HUD is also allocating $132 million for housing and homeowner counseling, more than half of which will go toward foreclosure assistance.