Though it has been a lynchpin for homebuyer financing, its own finances may prove challenging.
What originally began as a mere economic analysis by a University of Pennsylvania professor has quickly developed into an all-out inquiry into the financial solvency of the Federal Housing Administration (FHA), one culminating in testimonies and audits that put the agency’s possible need of a taxpayer bailout at 50 percent.
An arm of the Department of Housing and Urban Development (HUD), the FHA guarantees loans to low-income homebuyers with relatively low interest rates and down payments. Though the agency’s importance in home buying has never been more important – in the wake of tightening credit standards at private banks, demand for FHA financing has soared – all of the costly boom-era, subprime loans on the agency’s books are wrecking havoc on its balance sheets, fueling concerns that the FHA will need a Fannie Mae/Freddie Mac-style bailout from taxpayers.
Shaun Donovan, the secretary of HUD, testified last Thursday before the House Financial Services Committee that though the FHA’s finances are worrisome, he remains confident with how the agency is operating.
“While we all have been through the second-worst housing downturn in the history of the country, FHA, unlike many other institutions, retains a positive fund balance and the current book of business is strong,” Donovan said, quoted in a Wall Street Journal article on the FHA. He added, however, that “we need to take further steps to protect the taxpayer and we will continue to do that.”
Lawmakers, though, were unconvinced by Donovan’s statements. Stephen Lynch, for instance, a Democrat from Massachusetts, said that Donovan displayed a “pattern of denial.”
“You’ve dug yourself in such a deep hole that you’re going to need some funding,” Lynch said, in the Journal piece. “You’re going to need a bailout … We can’t have (lawmakers) raising concerns and the agency blowing us off and saying there’s no problem.”
Republican representatives were even more pointed in their comments. Jeb Hensarling, a Republican from Texas, likened the FHA’s predicament to that of Fannie and Freddie.
“FHA is likely a disaster in the making,” Hensarling said. “If we’re not careful, it may even become Fannie and Freddie, the sequel.”
The FHA has made attempts to raise its revenue. Since 2010, it has raise insurance premiums three times, which are the primary revenue method for the agency.
There is a definite limit, though, to how high the rates can be raise, Donovan said. Raise premium rates too aggressively, and less prospective homebuyers will have access to FHA financing, and the less who can access, the less homes will be sold, further driving down prices in an already delicate housing market.
The aforementioned audit of the FHA predicted that upcoming losses on the agency’s $1.1 trillion balance sheet would leave just $2.6 billion in reserves for the next 30 years, which account for only 0.24 percent of the agency’s mortgages. Though Federal law requires reserves to be at 2 percent of mortgages, the FHA has exceeded that limit the last two years.