The slow housing recovery has finally eroded the Federal Housing Administration’s meager capital resources with the anticipation that shortly the government’s mortgage insurer will need assistance from the U.S. Treasury.
FHA’s financial plight is the result of its support for the housing market after private sources of credit dried up. The 78-year-old program, born in the Great Depression, was designed to play a countercyclical role in housing downturns.
Without FHA’s support, house prices would have fallen further, more jobs would have been lost and the recession would have been deeper, said Eric Belsky, managing director of the Joint Center for Housing Studies at Harvard University.
In fiscal year 2006, FHA insured 314,000 home purchase loans when its stogy old 30-year fixed-rate mortgages had been marginalized by teaser subprime 2/28 ARMs. Despite falling house prices, FHA lenders made 996,000 home purchase loans in FY 2009.
FHA played its traditional role in a housing bust, according to John Weicher, a former FHA commissioner during the Bush years. “Serving a public policy purpose in times like these does not come free,” he said at an Urban Institute forum on Thursday. Weicher is currently a senior fellow at the Hudson Institute.
Next week FHA is expected to release the FY 2012 actuarial report prepared by independent auditors. The annual report provides a check up on FHA’s financial strength and its capital ratio.
There is talk that FHA may seek $3 billion to $20 billion from Treasury to keep its single-family insurance fund in the black. Semantics could be a key issue for some.
“It’s not a bailout,” said Jim Carr, a housing policy consultant and former Fannie Mae executive. “It’s a draw on the Treasury,” he insisted.
Since the housing bust in 2007, “major lenders have collapsed and private mortgage insurers have failed,” Carr said. “FHA is still standing.”
American Enterprise Institute resident fellow Edward Pinto expects FHA will probably have to seek another Treasury draw next year–provided the economy and housing market continue improve. If there is another downturn, “FHA will end up in a deeper hole,” he said. The former Fannie Mae credit risk expert has been very critical of FHA’s lending policies.
“FHA is trying to work its way out of a hole by expanding its insurance-in-force while making a significant percentage of high-risk loans,” Pinto told NMN. And they are collecting upfront premiums on new loans and to cover losses on old loans.
He was hoping a Romney administration would stop FHA’s risky policies of making low-downpayment, 30-year loans to people with low credit scores.
“My suggestion would be if you want to lend to people with FICOs below 660, they can have a choice: a 30-year fixed rate with 10% down or a 20-year term with 4% down.
But the Obama administration is unlikely to take that advice since the housing market is still dependent on government-backed loans. Today, half of all home purchase loans are guaranteed by FHA, Department of Veterans Affairs and Rural Housing Service.
Carr acknowledged that FHA faces financial challenges. But most of the bad FHA loans are due to a seller-funded downpayment program that Congress banned in 2008. That program encouraged sellers to inflate the sales price so they could the pay the downpayment for low-income buyers. These SFDP loans comprised 20% of FHA endorsements in FY 2006, which fell to 2.5% in FY 2009.
Those problem loans have been identified, Carr said. “It doesn’t warrant characterizing the whole agency as a failed federal agency.” He claims recent vintages of FHA loans will be the strongest the program’s history.
Carr is an independent consultant and a senior policy fellow with the Opportunity Agenda.
