The Federal Housing Administration (FHA) stated on Friday that it would need approximately $1.7 billion in Treasury funds for the 2013 fiscal year, though there are some intriguing caveats to the nature of the bailout funds.
This is the first time in the agency’s 79-year history that it has needed a bailout, and it comes after months of speculation by analysts and government officials; back in April, the Obama administration’s proposed 2014 budget had projected a $943 million bailout for the FHA.
An Unorthodox Bailout
Carol Galante, the FHA’s commissioner, reported on the agency’s need for bailout funds in a letter to Congress on Friday, though she was careful to note that it was not a bailout in the traditional sense.
- For one, the FHA does not require Congressional approval for bailout funds; because it has budget authority, the agency can draw funds from the Treasury without such approval.
- Also, the FHA is not necessarily drawing the bailout funds to shore up its finances or address any funding shortfalls. As Galante pointed out, the agency has more than $30 billion in reserves, but it is required by law to have enough reserves on hand to pay off all its claims for 30 years.
- Furthermore, the FHA’s current financial projections are based on older metrics that do not necessarily reflect the current state of the housing market; the agency’s projections for its insurance fund were originally made in December, and do not count 2013’s notable housing progressions, notably the increase in home prices, the decline in delinquencies and the FHA’s own tighter lending standards and higher premiums, which have boosted earnings for the agency.
- Because of that, Galante said the bailout funds are not an adequate reflection of the agency’s funds, and that when it updates its finances in the next few months, it may find as much as $5 billion in additional funding because of the aforementioned changes.
David Stevens, a former FHA commissioner and current president/CEO of the Mortgage Bankers Association, was even more direct in comments to CNBC.
“The draw is a mandatory draw, even though they will likely never need it based on real performance,” he said. “The FHA is producing the most profitable loans ever. The OMB budget as well as the CBO budget reflect that the past few book years are producing billions in ‘negative subsidy,’ meaning profit, to the Treasury.”
A Lingering Legacy of Loss
So if things are operating so swimmingly at the FHA, why were losses ever projected? The answer reveals a unique combination of public and private interests.
First, there was the nature of the FHA’s portfolio of loans. The FHA’s importance in the housing market has increased exponentially sine 2008. After the mortgage meltdown, private mortgage lenders dramatically scaled back their lending, and homebuyers resorted to FHA financing in unprecedented numbers to close their purchases. Thus, from 2007 to 2009, the FHA’s share of the purchase mortgage market rose from its historical average of 5 percent to nearly 40 percent; last month, the agency guaranteed roughly 23 percent of all purchase loans, and now has a portfolio of $1 trillion.
That radical increase in scope, though, came at a very unfortunate time. During that timeframe, home prices were falling precipitously and the economy was shedding jobs at a rapid rate, and many of the loans that the FHA guaranteed in that immediate post-boom period defaulted, resulting in losses for the agency. And now, with the FHA’s market share declining, it’s had less revenue to apply to those losses.
Second, the FHA’s finances during that post-boom period were further hampered by “DAPs,” or down payment assistance programs, which involved the seller of a home “donating” the down payment to the homebuyer via a third-party “charity,” opening the floodgates for unsuitable homeowners. Although the FHA attempted to eliminate DAPs, and although the IRS labeled them a “scam,” Congress kept DAPs in practice until 2008, leading to numerous defaults and losses for the FHA.
As Bill McBride put it on his “Calculated Risk” blog, “DAPs aren’t the only reason the FHA is facing a shortfall, but they played a key role in damaging the FHA’s finances.”