The Federal Housing Administration keeps attracting unwanted attention this week, with the Government Accountability Office releasing a report naming the agency one of dozens of government sectors designated as a “high-risk” due to its rapid growth in the mortgage finance space.
GAO essentially highlighted areas of government that are considered high risk and included the nation’s "outdated U.S. Financial Regulatory System" and FHA.
GAO elaborated on its criticism of the housing finance system, saying a new challenge for the U.S. is the dominance of Fannie Mae and Freddie Mac, while private capital remains on the sidelines.
Furthermore, the FHA’s single-family loan insurance portfolio has grown from $300 billion in 2007 to $1.1 trillion in 2012, GAO said.
"Although required to maintain capital reserves equal to at least 2% of its portfolio, FHA’s capital reserves have fallen below this level, due partly to increases in projected defaults on the loans it has insured. As a result, we are modifying this high-risk area to include FHA and acknowledge the need for actions beyond those already taken to help restore FHA’s financial soundness and define its future role," GAO said.
Rep. Scott Garrett, R-N.J., cited the FHA’s addition to the high-risk list as a sign that “government guarantees are not free, and, per today’s report, they clearly don’t bring about good policy."
The GAO report outlined steps that the FHA should take to lessen some of the risks, including higher capital requirements to avoid a Treasury draw in high-stress situations and more GSE reforms.