Obama administration officials hopeful FHA can avoid a bailout
WASHINGTON -- Obama administration officials said Friday they are hopeful that the Federal Housing Administration can avoid a bailout despite the agency’s increasingly troubled finances.
The FHA said it ended the latest fiscal year in September with $16.3 billion in projected losses, which could require an infusion of taxpayer money into the government agency for the first time in its 78-year history.
A final determination on a bailout would not come until next September and could hinge on continued improvement in the housing market, officials said. The agency also plans changes, including increasing the premiums it charges homeowners to back their loans, that it hopes will boost its reserves.
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 has expanded since the bursting of the subprime housing bubble.
The expanded role has drawn criticism from some lawmakers and analysts, who have warned it could put taxpayers at risk of propping up the agency, which has funded its operations entirely though insurance premiums.
“With its dual mission of providing access to homeownership for under-served 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 Friday. “That progress, however, has not been without stress.”
Most of the FHA’s problems stem from mortgages it backed from 2007 into 2009, Donovan said. Those loans are projected to result in $70 billion in future loss claims to the agency. Mortgages backed by the agency in the last two years are performing much better.
The FHA insures about $1 trillion in mortgages. It now backs about 15% of mortgages, up from less than 5% in 2007 but down from a high of nearly 30% in 2008 as the housing market was collapsing.
The FHA must hold enough cash reserves to cover future losses, but its annual actuarial report to Congress on Friday showed that the agency’s reserves as of Sept. 30 were $16.3 billion below anticipated losses.
The FHA’s net worth is not supposed to drop below 2% of the outstanding balances of the loans it guarantees. They ended the 2012 fiscal year at -1.44%, down from 0.24% at the end of 2011.
Senate Banking Committee Chairman Tim Johnson (D-S.D.), said he was “deeply concerned” by the report and would call Donovan to testify about how to get the FHA on “a fiscally sustainable path.”
“The FHA plays a critical stabilizing role in the nation’s housing market, and the Department of Housing and Urban Development and the administration need to do everything in their power to protect taxpayers and restore its capital reserve to the 2% level required by law,” Johnson said.
The actuarial report’s findings don’t determine whether the FHA will have to draw money from the Treasury, which it has the authority to do.
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 if 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 mortage insurance premiums by .10 percentage points -- 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.
The FHA’s report estimated that those changes will help generate $11 billion in additional revenue this fiscal year.
“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. “We are doing all of this to increase the likelihood that we will not.”
[For the record, 5:20 p.m. Nov. 16: An earlier version of this post said the FHA’s cash reserves aren’t supposed to drop below 2% of projected losses. Actually, its net worth must not drop below 2% of the outstanding balances of the loans it guarantees.]
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