FHA Commissioner Blames Accounting Rules for Bailout Request
The Federal Housing Administration has asked the Treasury Department for a $1.7 billion bailout, but its commissioner and others say the agency does not actually need the money.
FHA Commissioner Carol Galante said that the request for funds is based on an estimate of forecasted losses from December 2012 that cannot be changed or updated due to mandatory accounting rules. The next report to Congress will show that the agency is in far better health than it was a year ago, Galante wrote in a letter to lawmakers.
"Due to long-standing federal accounting procedures, this estimate will not be updated until the next budget cycle is completed a few months from now," she wrote.
But critics argue that the request for a Treasury bailout proves that the FHA has structural flaws and waited too long to fix troubled programs. They say that the FHA, at the urging of Democrats in Congress, took too long to rein in bad lenders, failed to cut off downpayment assistance programs with high defaults, and even lowered caps on its reverse mortgage programs for seniors, all of which have contributed to massive losses.
Some Republican lawmakers are already calling for swift passage of the Protecting American Taxpayers and Homeowners Act, which includes structural reforms to the FHA and would also wind down Fannie Mae and Freddie Mac. The Path Act would require that FHA's annual budget comply with generally accepted account principles.
"This bailout would require no congressional action, and that's a problem," Rep. Scott Garrett, R-N.J., said in a statement last Wednesday, when news of a potential bailout broke. "The Path Act, recently passed by the House Financial Services Committee, will reform our housing finance system and get the FHA back on track to prevent future bailouts."
Galante sent a letter to lawmakers last Friday requesting the $1.7 billion draw from the Treasury. It is the first time in the FHA's 79-year history that it has needed a Treasury infusion to shore up its finances.
The White House had predicted in its April budget that the agency would need $943 million to close a funding gap for the year, but the gap widened in recent months as a slowdown in mortgage activity, due to rising interest rates, reduced the FHA's income.
Galante wrote that losses on loans originated from 2007 to 2009 and the FHA's reverse mortgage program are "responsible for the most severe strain" of the FHA's finances.
But Galante and others blamed the budget shortfall primarily on accounting rules. The Federal Credit Reform Act of 1990 requires the agency to cover all expected future losses for 30 years and maintain a 2% capital reserve.
David Stevens, the president and CEO of the Mortgage Bankers Association who was the FHA commissioner before Galante, says those projections have little to do with the actual health of the agency's Mutual Mortgage Insurance fund today.
"No bank in America reserves for credit losses on a 30-year terms, instead banks get to adjust reserves based on economic conditions," Stevens says. "But this is very complicated, very unique accounting and technically they have to draw the funds even if they don't need the money."
Moreover, in 2009 policymakers shifted the accounting for reverse mortgages to the FHA's insurance fund, which had a negative balance of $2.8 billion in fiscal 2012. Without that change, the FHA would not have needed to tap Treasury at all.
The Office of Management and Budget projected earlier this year that the FHA would have to pay future claims of $57.5 billion, based on data from December 2012. But government accounting does not allow the FHA to adjust the present value of future costs. Because of lower loan volume, the FHA ended the year with $55.8 billion, resulting in a $1.7 billion shortfall.
If the FHA takes in more money into its capital reserve account and goes above the 2% capital buffer, it would return the $1.7 billion to the Treasury.