FHA Confirms They’re In Real Trouble
by Tim Manni
In terms of this blog — in 2009 alone, it started out with warnings that the subprime market would return. When the below-prime market did return, it found a home with loans guaranteed by Federal Housing Administration (FHA). From there our coverage morphed into blog posts that skeptically documented the FHA’s growing balance sheets. Soon after, we flat out knew that the FHA was going to cost us (taxpayers).
Earlier this month HSH President Paul Havemann presented the exact scenario that would cripple the FHA’s lending abilities. Paul warned that “If [the FHA's] reserves falls below the minimum, either FHA will have to get out of the loan-insurance business until it improves… or Congress will have to shore up the FHA reserves with cold, hard cash.” The minimum for the FHA’s reserve fund must stay above the required level of two percent.
Adding to the concern, the FHA’s fund to cover losses has dropped to a projected 3% of insured loans. That’s a leverage ratio of 33-to-1, the level banking giant Bear Stearns was at before it failed.
As a whole, HSH has been monitoring the FHA’s seeming demise for a while now, and today we have the next piece of the puzzle. The some-what expected, but all the while frightening, announcement made by the FHA confirmed the exact scenario Paul had warned us about:
The Federal Housing Administration has been hit so hard by the mortgage crisis that for the first time, the agency’s cash reserves will drop below the minimum level set by Congress, FHA officials said.
“It’s very serious,” FHA Commissioner David H. Stevens said in an interview. “There’s nothing more serious that we’re addressing right now, outside the housing crisis in general, than this issue.”
An independent audit due out this fall will show that the agency’s reserves will drop below the 2 percent level as of Oct. 1, the start of the new fiscal year, Stevens said.
However, Stevens seems adamant against both asking Congress for money and raising premiums on FHA loans. Stevens has already announced some strategies “that should help the reserves rebound quickly,” including one that will address “fraudulent loans”:
For one, he will propose that banks and other lenders that do business with the FHA have at least $1 million in capital they can use to repay the agency for losses if they were involved in fraud. Now, they are required only to hold $250,000. Second, he will propose that lenders also take responsibility for any losses due to fraud committed by the mortgage brokers with whom they work.
In an effort to reduce the risks faced by the agency — and thus the potential for losses — Stevens said he plans to hire a chief risk officer by the end of the year. The agency has never had one in its 75-year-history.
Stevens said that even without these measures — some which have already been in the works for some time now — the FHA’s reserves should recover in a few years due the natural recovery of the housing market. Furthermore, Stevens assures that the FHA’s reserves are not the only fund that the Administration has at its disposal.
We don’t expect the below-prime market to go away anytime soon — there’s serious demand there. Would the FHA’s reserves have been in better shape if Congress hadn’t voted against risk-based pricing? We’ll continue to monitor the health of the FHA, as it’s bound impact taxpayers one way or the other.
For more on risk-based pricing, click here and here.
