It’s not every day that the HUD secretary calls a flesh-and-blood press conference for mortgage reporters, handing out paper instead of electronic files and then issuing a strict edict on a noon embargo. Then again, it’s not every day that the FHA Mutual Mortgage Insurance fund goes into the red by $16.3 billion.
Of course, the MMI isn’t really in the red—it’s only there on a cash flow (present value) accounting basis. Confused? Welcome to the club.
But let’s back up a little. First of all, HUD secretary Shaun Donovan wasn’t actually at the recent press conference where the annual FHA audit was released to a story-hungry press. He phoned it in from New Jersey where he was dealing with the human suffering caused by Hurricane Sandy.
Acting FHA commissioner Carol Galante and senior HUD advisor Bob Ryan were left to answer questions from the press who tried to pin the agency down on just how bad the MMI problem is and how deep the hole might go. But the situation, you might say, is fluid.
FHA has roughly $30 billion in cash on hand (right now) to pay claims. Thanks to all the bad loans that mortgage lenders jammed into the FHA program during the years 2007 to 2009—before the government insurer woke up -- the agency is now sorting through $70 billion in claims from its delegated underwriters, also known as lenders.
Those claims (the $70 billion figure) won’t be paid right away. A claim is just that—a lender puts it for that amount but that doesn’t mean that’s how much cash is going out the front door.
Galante told National Mortgage News that in fiscal year 2012 (ending Sept. 30) the agency paid out $18 billion in claims.
It’s not likely that the agency will pay out $70 billion in any one year, but it might have to, eventually.
Meanwhile, HUD is taking in new cash all the time in the form of insurance premiums on new and existing loans. The incoming cash isn’t factored into the red ink equations.
FHA is also selling nonperforming loans and asking for damages from seller/servicers that cut corners on underwriting and wound up sending in endorsements that went south. It hopes cash generated from these activities also will also bolster the MMI.
However, if claims eventually swamp the fund—and more cash is going out in claims then coming in—it will need to tap a line of credit it has with the U.S. Treasury. And that’s where all the headlines from the daily (general) press come in.
So, is FHA broke? Answer: Not yet. It all depends on cash flow. If new premiums can general enough money, and if that $70 billion figure can be negotiated down, then it hopes to squeak by without tapping Treasury (and avoiding political rancor).
Its message to the public comes across as follows: “Yes, we have a crisis in our $1.1 trillion book of business. But we think in time the MMI will be back in the black—by $21 billion in 2016. Trust us.”
At the very least, both mortgage bankers and Congress will be watching the MMI carefully. To deal with the cash flow crisis FHA is raising upfront premiums by 10 basis points and embarking on an aggressive program to sell 40,000 delinquent loans a year. Will it succeed? We all know pretty soon.
