The Federal Housing Administration said Monday that it has just $3.5 billion in cash and Treasury securities left in its 'capital reserve account' after transferring $9.8 billion to another account to cover possible losses on its loan portfolio.
The money sitting in the CRA represents a 71% decline in just three months time and suggests the FHA is bracing for major payouts to settle claims. (At March 31 the CRA had $12 billion in cash and Treasuries.)
Although the capital reserve account fell precipitously, FHA reported that the total capital resources available to the Mutual Mortgage Insurance (MMI) fund increased to $33.1 billion at June 30, from $32.2 billion at the end of the first quarter.
Industry groups recently warned Congress that the government insurer's capital reserve has "fallen dramatically," due to a reforecast of possible loan defaults and foreclosures over the life of FHA's insured mortgage portfolio.
The industry is urging Congress to act quickly on a bill that would allow FHA to adjust its premium structure. The change allows FHA to replenish its capital reserves and avoid a taxpayer bailout.
On Monday, FHA released its fiscal year 2010 third quarter status report, which shows the drop in the capital reserves. It also shows that FHA was able to offset an increase in claims in the second and third quarters by raising its upfront premium from 50 basis points to 2.25% on April 5.
The increase in upfront premiums allows the FHA fund to become cash flow positive.
The report notes that fiscal year 2009 and 2010 FHA originations are performing very well but the claims rates on earlier books of business (FY 2007 and FY 2008) are expected to be 20% higher.
However, the FY 2009/FY 2010 book will be the "greater driver" of FHA performance going forward since the latest vintages are so much larger than the FY 2007/FY 2008 book.
The Senate is considering a bill that would allow FHA to raise its annual premium and increase its revenue stream by $300 million a month.
