FHA runs low on cash, fueling bailout concerns
Joseph Williams from Boston.com reports that another government concern is running out of money. FHA acknowledged that they are burning through their cash reserves at an astronomical rate. What this means is that they will request more money from the government which will fire up the printing presses and devalue our dollar. It will be interesting if FHA’s policies towards first time home buyers will be effected.
According to Mr. Williams, “The FHA does not make loans itself, but insures against default. Borrowers are willing to buy the insurance because FHA-backed loans require down payments of only 3.5 percent of the purchase price. But Donovan said the agency is considering raising the minimum down payment, as well as insurance premiums for borrowers – moves that would mean fewer people would be able to get loans. When credit markets seized up at the height of the financial crisis, Donovan said, FHA picked up the slack and now holds as much as 30 percent of the mortgage market – including guaranteeing more than half of all home loans held by African-Americans and nearly 60 percent of mortgages held by Latinos.
Overall, it insured nearly a quarter of all new loans made this year, including about half of all loans to first-time homebuyers. The FHA backs about 5.3 million mortgages, up from about 4 million three years ago.”
Scary facts!
FHA runs low on cash, fueling bailout concerns
Fears hit if prices slip; But audit sure of solvency
“It is absolutely critical that going forward, we build that cushion back up,’’ Housing Secretary Shaun Donovan said.
By Joseph Williams
WASHINGTON – The Federal Housing Administration, which propped up the collapsing housing market last year, acknowledged yesterday that it has drained its cash reserves to dangerously low levels, heightening concerns that it might need a taxpayer bailout.
The agency, which guarantees loans for many first-time homebuyers, could be hit if housing prices lose ground or if a new wave of mortgage defaults, triggered by double-digit unemployment, crashes into the market in the coming months.
If the FHA runs into financial trouble, it could make it more difficult for borrowers to get loans, particularly first-time buyers.
Housing Secretary Shaun Donovan said while an independent audit showed that the FHA burned through its backup fund as defaults and foreclosures spiked during the mortgage crisis, the analysis also showed that the agency should remain solvent under “most economic scenarios,’’ including higher unemployment and mortgage defaults.
Nevertheless, “it is absolutely critical that going forward, we build that cushion back up,’’ Donovan said at a news conference.
The FHA’s cash reserves have plummeted to $3.6 billion, compared with $685 billion in outstanding insured loans – a ratio of 0.53 percent that is far below the 2 percent required by Congress and a fraction of the 6.4 percent reserve ratio in fiscal 2007. In Massachusetts, FHA backs 44,000 home loans, slightly less than one percent of its national loan portfolio. The Bay State’s default rate is 0.56 percent of loans, less than half the national rate of 1.25 percent.
While agency officials say they have kept high standards on the creditworthiness of borrowers, critics say those homebuyers are not immune to default – particularly if job losses keep soaring and the recent increase in home prices doesn’t stick. About 17 percent of FHA borrowers are at least one payment behind or in foreclosure, compared with 13 percent for all loans, according to the Mortgage Bankers Association.
“Real risks remain to the taxpayers,’’ said Sarah Rosen Wartell, a former FHA official who is now executive vice president of the Center for American Progress, a Washington think tank. The agency, she said, “has a lot of serious problems’’ as it navigates an uncertain housing market and a fragile economy.
Donovan and FHA Commissioner David Stevens said they are carefully monitoring economic conditions.
Representative Barney Frank of Massachusetts, chairman of the House Financial Services Committee, said he’s concerned that higher unemployment could curtail the agency’s ability to back loans. “We’re just going to keep watching them carefully’’ to determine whether they need congressional help to stay above water, he said.
Frank also said he has proposed taking $2 billion from funds repaid after the Wall Street bailout to “lend money to people facing foreclosure because of unemployment. I am pressing hard to get that done. I believe we can substantially reduce that second wave if we do that.’’
The FHA does not make loans itself, but insures against default. Borrowers are willing to buy the insurance because FHA-backed loans require down payments of only 3.5 percent of the purchase price. But Donovan said the agency is considering raising the minimum down payment, as well as insurance premiums for borrowers – moves that would mean fewer people would be able to get loans.
When credit markets seized up at the height of the financial crisis, Donovan said, FHA picked up the slack and now holds as much as 30 percent of the mortgage market – including guaranteeing more than half of all home loans held by African-Americans and nearly 60 percent of mortgages held by Latinos.
Overall, it insured nearly a quarter of all new loans made this year, including about half of all loans to first-time homebuyers. The FHA backs about 5.3 million mortgages, up from about 4 million three years ago.
Yesterday, RealtyTrac Inc., a foreclosure listing firm, reported that the number of households that received a foreclosure-related notice fell in October, the third straight monthly decline. “Foreclosures are still far higher than we want them to be, but we do appear to have them on the right path now,’’ Donovan said.
“None of us has a crystal ball. None of us knows what the economy is going to look like,’’ he said. “The issue is, we need to return those reserves to a higher level to protect taxpayers’’ and avoid asking Congress for bailout money.
The FHA audit “is a major wake-up call for FHA and the lending community, but no reason to panic,’’ John A. Courson, the Mortgage Bankers Association’s president and chief executive officer, said in a statement yesterday. The reserve requirement, he said, was set up to make sure the agency could survive “the stress of a major housing and mortgage event. It is safe to say that FHA is facing that type of event today.’’