FHA sets stage for taxpayer subsidy with $16.3 billion deficit

, Bloomberg

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Spencer-Bachus
Spencer Bachus

The Federal Housing Administration said mounting losses from defaults on loans it backed during the housing bubble left its insurance fund with a $16.3 billion deficit for the fiscal year ended Sept. 30.

A report by an independent actuary that will be released today sets the table for a possible taxpayer subsidy for the government mortgage insurer for the first time in its 78-year history. It shows that the fund’s assets aren’t enough to cover projected losses on the $1.1 trillion portfolio of mortgages the agency insures.

In a statement issued yesterday, the FHA said the report didn’t show it would need an immediate draw from the U.S. Treasury.

“This does not mean FHA has insufficient cash to pay insurance claims, a current operating deficit, or will need to immediately draw funds from the Treasury,” the agency said in the statement. The FHA’s budget needs will be determined when President Barack Obama releases his fiscal-year 2014 budget in February, according to the statement.

House Financial Services Committee Chairman Spencer Bachus said yesterday that he had been told by agency officials that the FHA might need Treasury aid within a month. The agency doesn’t need prior approval from Congress to receive a financial infusion from Treasury.

“Because of the number of foreclosures, they’ve indicated they will have to come to the American people and ask for money,” Bachus, an Alabama Republican, said in an interview.
More than 17 percent of all FHA loans were delinquent in September, according to data on the agency’s website.

Down Payments

The report blamed the fund’s losses largely on loans in which sellers were allowed to cover the down payment on behalf of the buyer, often by inflating the price of the house. Congress banned such loans beginning in 2009.

FHA will propose increases in the premiums it charges to insure mortgages as one solution to its financial shortfall, Bachus said during a news conference in Washington.

The agency’s mounting losses could create political challenges for the Obama administration at a time when Republicans and Democrats are engaged in negotiations over how to solve the nation’s fiscal woes. It also could hamper a White House effort to expand FHA’s role as an insurer for borrowers whose homes are worth less than they owe on them.

“While the loans made during this administration remain the strongest in the agency’s history, we take the findings of the independent actuary very seriously,” FHA Acting Commissioner Carol Galante said in the statement issued yesterday.

‘Aggressive Steps’

“We will continue to take aggressive steps to protect FHA’s financial health while ensuring that FHA continues to perform its historic role of providing access to homeownership for underserved communities and supporting the housing market during tough economic times,” Galante said.

In advance of the report, FHA officials emphasized the role the agency plays in the economy as a backer of home loans for low-income borrowers who do not have large down payments. Agency officials have been sending out messages on Twitter with the hashtag #FHAmatters.

FHA currently backs 15 percent of U.S. mortgages issued for home purchases. The agency provides liquidity to the housing market by insuring lenders against losses on loans with down payments as low as 3.5 percent. Lenders are made whole if the mortgages default.

Avoiding Subsidy

In the past two years, FHA has raised premiums and tightened credit standards in an effort to avoid seeking government aid. This year, it avoided taking a taxpayer subsidy despite mounting losses because it received a one-time payment of almost $1 billion from a legal settlement over claims that mortgage servicers botched foreclosures.

FHA’s finances rebounded, at least temporarily, after it increased insurance premiums on new single-family home loans in April by 75 basis points to 1.75 percent of the loan amount.

For the agency’s 2012 report, its actuary changed the economic modeling to include less-optimistic home-price projections and a revised assessment of loans from earlier years that have been refinanced more recently.

 

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