The government-backed mortgage insurer, which warned in last year’s report that its insurance fund was being drained, has raised premiums and tightened credit standards in an effort to avoid asking for a taxpayer subsidy.
Still, the improved quality of recent FHA-backed loans -- now comprising 15 percent of U.S. mortgages for home purchases -- may not offset continuing defaults from loans made from 2005 to 2008, said the people, who spoke on condition of anonymity because the report is not yet final.
The annual report to Congress, based on analysis by an outside actuary, could hamper a White House effort to expand FHA’s role as an insurer for underwater borrowers. FHA officials and supporters are preparing to counter the downbeat projections by highlighting how the agency helps the economy.
“If FHA alone simply stopped doing business, we would have been propelled down into another double-dip recession,” said John Griffiths, an analyst at the Center for American Progress, a research organization aligned with Democrats.
The FHA was established in the wake of the Great Depression to help first-time and low-income Americans buy homes. It provides liquidity to the housing market by insuring lenders against losses on loans with down payments as low as 3.5 percent. Lenders are made whole if the mortgages default. Unlike Fannie Mae and Freddie Mac, the mortgage finance companies under U.S. conservatorship, FHA itself does not package loans into securities or guarantee principal and interest payments.
FHA spokeswoman Tiffany Thomas Smith declined to comment on next week’s report.
The FHA’s troubles stem from rising defaults on mortgages it insured during the peak years of the housing bubble. The agency now insures about 7.6 million loans with total outstanding balances near $1.1 trillion, triple the amount it backed five years ago.
The agency could cover its costs in the past because revenues from its insurance premiums exceeded claims. This year, it avoided taking a taxpayer subsidy despite mounting claims because it received a one-time payment of nearly $1 billion from a legal settlement over mortgage servicers’ flawed foreclosure practices.
Financial market players already widely regard the FHA’s insurance fund as broke, so the report shouldn’t have a big impact, said Paul Miller, managing director at FBR Capital Markets Corp. Banks already are offering FHA loans only to the most creditworthy borrowers because they’re afraid they’ll be forced to take the loss if the borrowers default, he said.