Significant losses on mortgage loans have caused the Federal Housing Administration’s cash reserves to fall well below the minimum required by law, raising concerns that the self-funded agency may require a congressional bailout.
An annual independent audit of the
FHA found that its capital reserves have fallen to 0.53 percent of its total outstanding loans, well below the 2 percent minimum required by Congress. Last year, the reserves stood at 3 percent, but losses on mortgages issued prior to this year have taken a toll.
Even so, the independent auditor said it does not expect the FHA’s reserves to go into deficit and require additional cash from Congress to remain solvent. In addition to its capital reserves, the FHA also maintains 30-year reserves in a separate account to cover loans on existing loans; together, the two accounts represent 4.5 percent to the total mortgage loans insured by the FHA.
Role in mortgage market greatly expands
Concerns over the FHA’s solvency are driven not only by current losses on existing mortgages, but also by the ever-larger role in the agency is playing in the nation’s mortgage markets as other lenders have tightened credit. The agency currently accounts for one-quarter of all mortgages issues today, according to Inside Mortgage Finance, up from 2 percent in 2006. According to the FHA’s own figures, half of all first-time homebuyers used an FHA mortgage in the second quarter of 2009.
The FHA had previously predicted its reserves would fall below the 2 percent minimum and has taken a number of measures to limit future losses. Among them, it has eliminated a seller-financed down payment program, tightened underwriting standards on streamlined refinances and increased oversight of lenders. The average credit score of borrowers has also increased, to 693 today compared to 633 two years ago.
The FHA’s share of the mortgage market during the economic downturn has grown in large part due to flexibility on credit scoring and generous down payment requirements, allowing mortgages with as little as 3.5 percent down, a figure almost unheard of among private lenders these days.
The FHA’s growing share of the mortgage market and dwindling reserve fund has generated a debate as to the government’s proper role in providing home loans. Some contend the FHA’s growing role is suppressing a recovery by private mortgage lenders by undercutting the terms they can offer; others, however, argue that the FHA’s efforts are helping to support housing prices and encourage sales that would collapse again if FHA support were restricted.
The FHA does not actually issue mortgages itself, but insures mortgages that conform to its guidelines, thereby giving lenders confidence to issue loans they would not make otherwise. The FHA charges a small premium on all mortgages it insures, similar to what is commonly charged for private mortgage insurance (PMI).
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