FHA Deficit Leads to Concerns of a Possible Bailout

Vintage loans brought the ""Federal Housing Administration's"":http://portal.hud.gov/hudportal/HUD?src=/federal_housing_administration (FHA) Mutual Mortgage Insurance (MMI) Fund to its knees in fiscal year 2012, but the agency insists it does not immediately need to draw from the ""Treasury"":http://www.treasury.gov/Pages/default.aspx.

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A review conducted by an independent actuary found that the capital reserve ratio of the MMI Fund fell below zero to negative 1.44 percent, representing a negative economic value of $16.3 billion.

According to a release from FHA, ""[l]osses on loans insured between Fiscal Years 2007 and 2009 continue to place a significant strain on the Fund with $70 billion in FHA claims attributable to loans insured in those years.""

The agency also saw losses from the ongoing effect of seller-funded down payment assistance loans. Though the practice was put to an end in 2009, the expected cost of those loans made before that time is more than $15 billion.

Low interest rates have also been a problem for FHA. While the overall economy is benefiting, the agency is taking losses as borrowers refinance their loans into lower rates. In addition, those who don't qualify and continue to pay at high rates are more likely to default.

However, in a ""financial status report"":http://portal.hud.gov/hudportal/documents/huddoc?id=F12MMIFundRepCong111612.pdf issued to Congress, HUD says the agency is not down and out just yet.

""This does not mean FHA has insufficient cash to pay insurance clams, a current operating deficit, or will need to immediately draw funds from the Treasury. The need to draw on Treasury funds is determined not by the economic assumptions of this actuarial review but those used in the President's FY 2014 budget proposal to be released in February,"" HUD said.

The final determination on a potential Treasury draw will be made in September.

FHA also noted the actuary's estimate of the MMI Fund's economic value leaves out $11 billion in expected capital accumulation through the end of fiscal year 2013. The fund's capital ratio is expected to reach positive figures by the end of fiscal year 2014, assuming there is no change in policy or action taken by the agency.

Still, the report lays out a series of initiatives designed to improve the health of the MMI Fund and reduce the likelihood of a Treasury draw. Those initiatives include the continuation and expansion of foreclosure alternative programs and an increase on the annual insurance premium paid by borrowers on new FHA loans. The premium increase is expected to add $13 per month for the average borrower, strengthening FHA's capital position without making credit access tighter.

Industry analysts and trade organizations had mixed reactions to the report. ""Barclays"":http://group.barclays.com/home pointed out that while base-line assumptions would put the fund in the black by 2014, a more pessimistic scenario could set the fund's economic value back until at least fiscal year 2019. The firm also expressed skepticism over whether a raise in insurance premiums will be sufficient to off-set the near-term need for money.

However, with policymakers likely to use the report as a platform to review FHA's role in the housing market, many representatives from various organizations spoke favorably of the agency. Julia Gordon, director of housing finance and policy for the ""Center for American Progress"":http://www.americanprogress.org/, said the $16.3 billion dollar shortfall does not mean FHA's basic business model is flawed.

""Today's news reflects the almost inevitable result of the Federal Housing Administration stepping into the breach after the housing bubble burst and private capital fled the housing market,"" Gordon said. ""By living up to its congressional mandate to provide support to the housing market in hard times, the Federal Housing Administration not only funded home loans for 7 million families, but prevented even more catastrophic home price declines.""

In addition, Barry Rutenberg, chairman of the ""National Association of Home Builders"":http://www.nahb.org/, called for policymakers to ""proceed cautiously.""

""The fact that the FHA finds itself in this position now, as opposed to four years ago during the height of the financial meltdown, is testament to its ability to meet its mission in these difficult economic times,"" Rutenberg said.

Debra Still, CMB, chairman of the ""Mortgage Bankers Association"":http://www.mbaa.org/default.htm, said the report opened a door for an ""open, robust discussion over the future of the government's role in housing finance.""

""While there is near-unanimous agreement that FHA's role in the single family housing market today is too large, we must remember that the housing market would be far worse off, today and in the future, without FHA,"" Still said. ""For that reason, MBA stands ready to work with policymakers to consider appropriate reforms in a measured and methodical way in order to protect the MMI fund and enable FHA to continue to perform its mission in the single family market.""