FHA's reserves fall into the red
As the housing market recovers, one government agency is still paying the price for helping to stabilize it -- and taxpayers could get the bill.
The Federal Housing Administration, whose mortgage insurance business skyrocketed during the Great Recession of 2007-09, said Friday that its reserves to cover losses dropped into negative territory for the fiscal year that ended Sept. 30.
The agency has $30.3 billion in cash reserves to cover $46.6 billion in projected losses in coming years -- a shortfall of $16.3 billion that could force it to tap the U.S. Treasury for the first time in its 78-year history to shore up its finances.
"Clearly, they're in trouble financially," said Guy Cecala, publisher of Inside Mortgage Finance. "I don't think there's any argument that FHA was ill-equipped to handle that overnight change to their business volume, and they've been playing catch-up ever since."
The FHA insures loans with down payments of as low as 3.5%, often to low-income borrowers, and its role in the mortgage market began expanding dramatically in 2007 as banks pulled back on lending in the face of plunging home prices -- unless the agency guaranteed the loans.
Those mortgages, many of them now underwater, are a major drag on the finances of an agency that has been funded entirely through insurance premiums.
"With its dual mission of providing access to homeownership for underserved populations and supporting the housing market during tough times, there is little doubt that FHA helped prevent a much deeper crisis," Housing and Urban Development Secretary Shaun Donovan told reporters.
"That progress, however, has not been without stress," he conceded.
The FHA's net worth must not drop below 2% of the outstanding balances of the loans it guarantees. But in its annual actuarial report to Congress, the agency said its reserve ratio ended the fiscal year at -1.44%, down from the seriously low level of 0.24% at the end of the previous fiscal year. The figure was 0.5% at the end of 2010.
A final determination on tapping into Treasury's funds would not come until September and could hinge on continued improvement in the housing market, officials said. The agency also plans to boost its reserves by making such changes as increasing the premiums it charges homeowners to back their loans.
Obama administration officials hope the changes will help the FHA avoid drawing money from the U.S. Treasury, which the agency has the authority to do without seeking congressional approval.
"We are taking all the actions that we feel are appropriate, including increase in premiums [and] including changes in policies, to ensure that we are generating appropriate revenue moving forward," said acting FHA Commissioner Carol Galante.
"It is literally impossible to say that we will or won't need a draw," she said. "We are doing all of this to increase the likelihood that we will not."
The FHA's expanded role in the housing market has drawn criticism from some lawmakers and analysts, especially in light of the bailouts of seized housing finance giants Fannie Mae and Freddie Mac.
Taxpayers are on the hook for $137 billion in those rescues, though Fannie and Freddie have turned profitable and have started paying down what they owe.
But FHA's finances have been getting worse. One specific criticism is the agency's practice of lending to so-called rebound buyers, people who defaulted on a mortgage as recently as three years earlier.
Senate Banking Committee Chairman Tim Johnson (D-S.D.), said he was "deeply concerned" by Friday's FHA report and would call Donovan to testify about how to get the agency on a fiscally sustainable path.
Rep. Scott Garrett (R-N.J.) said the news of FHA's deteriorating finances was not surprising given warnings about its finances in recent years.
"This is yet another example in which the government has stepped in, mispriced risk, acted as a backstop and put the taxpayer in a position of bailing them out," he said. He blamed the Obama administration for not doing more to stabilize the agency's finances.
But Rep. Maxine Waters (D-Los Angeles) noted that the FHA has helped millions of people buy homes since it was created in the Great Depression. And although the agency's finances are in trouble, she said, Congress "should not act precipitously to limit loan availability, especially as the housing recovery remains fragile."
In 2009, the agency boosted premiums and took other steps to shore up its capital reserves. But the FHA's finances continued to be dragged down by the loans it backed from 2007 to 2009, Donovan said.
Mortgages backed by the agency in the last two years are performing much better, he said.
The FHA insures more than $1 trillion worth of mortgages. It has backed about 14% of new mortgages this year, up from less than 5% in 2007 but down from a high of nearly 30% in 2008.
The White House will use the report to help make its own projections of agency funding as part of President Obama's 2014 budget, to be released in February. At that point, the administration would determine whether taxpayer money is needed to prop up the FHA, with a final determination coming at the end of the fiscal year in September.
Continued improvement in the housing market would help the FHA's long-term outlook. And the changes coming soon also will help generate more revenue and reduce future losses, officials said.
The FHA plans to increase mortgage insurance premiums by about $13 a month for the average homeowner for new loans it guarantees, as well as end a policy for future loans that allowed homeowners to stop paying insurance premiums before the loan was paid off.
Among other changes are selling off at least 40,000 delinquent loans a year and streamlining short sales to reduce losses from foreclosures.