The Federal Housing Administration, which has been a cornerstone to the government’s fight to sure up the housing market, may find itself in the awkward position of needing a taxpayer bailout unless it manages to bring in new forms of revenue.
FHA loans have played an integral role in keeping the housing market afloat and it remains unclear what a government funded bailout may actually mean for the economy. If no other solution is found and the FHA does end up receiving a taxpayer funded bailout, it would be the first time in the agency’s eight decade long history that such an occurrence took place. Executives within the agency are looking for solutions to shore up the agency’s books and hopefully avoid a taxpayer bailout.
An independent audit has shown that the FHA’s revenue is still below its expected losses. To give some perspective, the FHA is required by law to maintain at least 2 percent of its portfolio’s net worth in its reserves. If the agency’s expected losses remain steady going into 2013, it will have negative 1.44 percent on hold in its reserves. This is roughly the equivalent of $16.3 billion dollars.
“They have about $600 million, as I understand, that they’re burning through. And within a month, because of the number of forclosures, they indicated they will have to come to the American people and ask for money,” said Spencer Bachus, a republican representative of Alabama.
Shaun Donovan, the secretary of housing and urban development, stressed that the FHA would be taking a series of new steps in order to forestall a bailout. Some of the proposed solutions have immediate consequences for those looking to borrow money for a home loan.
One of the measures has the FHA increasing its annual mortgage insurance premiums by as much as ten basis points. According to Secretary Donovon, this will cost borrowers about $13 dollars a month. A slew of other proposals include renewed efforts to aid families in preventing costly foreclosures, selling off delinquent loans and increasing short sales for homes where the value of the loan surpasses the value of the property.
But even with all the proposed solutions, the FHA would be closer to its goals but still underwater. The new measures are expected to increase the revenue of the FHA by approximately $8 to 10 billion for 2013 and 2014.
That’s roughly half of what they would need in order to make up for all of their losses. This has prompted Secretary Donovan to say: “We need help from Congress.”
The FHA believes that there are three primary reasons for its recent under performance. First, actuarial reviews have used lower house appreciation estimates than in years past.
Second, despite the fact that low refinancing rates have been beneficial to borrowers, they remain a strain for the FHA. With borrowers better positioned to pay off their mortgage, the FHA has fewer means to gather money.
Lastly, adjustments to forecasting models used in actuaries have overestimated the amount of losses incurred on defaults and reverse mortgages.
A final decision about a potential bailout will not come until the fall when the White House and Congress have a chance to review the FHA’s financial standing.