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Lending

FHA needs $1.7B bailout

Decline in FHA endorsement volume leads to shortfall

money_health

The Federal Housing Administration will require a $1.7 billion bailout from the Treasury to cover project losses in mortgage-related programs, officials told Congress in a letter Friday.

This will be the first time the agency will require taxpayer support in its 79-year existence. In April, White House officials projected a $943 million shortfall for the current fiscal year, which ends Sept. 30.

"The amount is higher than the estimate provided in the president's budget because of a decline in FHA endorsement volume in the last few months of the fiscal year -- consistent with the trend in the broader housing market in response to higher interest rates," explained FHA Commissioner Carol Galante.

She added, "It is also consistent with FHA's goal of reducing its footprint in the market."

The losses for the agency signal the critical role the government has endured to restructure housing after the meltdown. The budget shortfall has increased since April due to lower mortgage volumes and higher interest rates.

The primary driver of the shortfall is the $5 billion in losses in the FHA's reverse mortgage program -- also known as the Home Equity Conversion Mortgage program. FHA officials have attributed any remaining financial stress to loans insured in 2009 and prior from mortgages insured under this program.

Nonetheless, Galante is confident about the ongoing health of the FHA.

"In the next few months we expect updated data and economic forecasts to reflect what we already know to be true -- the health of the Fund has improved significantly," she stated.

The FHA Commissioner continued, "In the meantime, FHA will continue to focus on protecting and improving the performance of the Fund -- playing its critical role ensuring access to credit for qualified borrowers in underserved markets."

The bailout is likely to reignite debate about whether FHA should shrink its role in the mortgage finance industry, with reports earlier this week leading to policymakers to call for the agency's reform.

"This is incredibly disappointing," stated Rep. Randy Neugebauer, R-TX. "I'm shock to find out now that FHA will require nearly double the amount they projected. Unfortunately, the Administration is losing credibility on this issue."

He continued, "This news is a clear sign that we must act quickly to reform the FHA, or taxpayers will be paying the price again and again."

However, many mortgage experts believe the chance of a real FHA reform is slim-to-none due to the mechanics of the draw and the policy dynamics currently surrounding the mortgage finance debate.

To be clear, the FHA draw does not need direct authorization from Congress, which means there is no 'must pass' piece of legislation. 

"Although this one-time transfer of funds from the Treasury is legally necessary, it's important to note that FHA is far from bankrupt, holding over $30 billion in reserves and continuing to generate revenue," explained Rep. Maxine Waters, D-Calif.

She concluded, "Above all, we must strive to have a healthy, viable FHA that can continue to facilitate homeownership for first-time and low-income homebuyers, while standing ready in the unfortunate event of another housing downturn."

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