FHA doubts future bailout needed
It is highly unlikely home prices would fall far enough to force the Federal Housing Administration to take any bailouts, according to Acting Commissioner Carole Galante.
The Mutual Mortgage Insurance Fund capital ratio dropped to 0.24% in the fiscal year 2011 from 0.5% last year, according to the annual report to Congress. Federal law mandates the fund ratio remain above 2%, but it dropped below that mark in 2009 and has yet to return.
Under a baseline scenario for home price fluctuations developed by Moody's Analytics, the FHA wouldn't push above the 2% threshold until 2014, which is sooner than last year's projection due to insurance premium changes the FHA made.
The baseline assumes an additional 5.6% decline in home prices, which Moody's estimates will bottom in 2012, a forecast supported by other analysts. Should the economy worsen more than expected, the chance of the reserve dropping into negative territory increases as shown in the graph below.
"With economic net worth being very close to zero under the base-case forecast, the chance that future net losses on the current, outstanding portfolio could exceed current capital resources is close to 50%," according to the study.
Joseph Gyourko, a real estate and finance professor at the University of Pennsylvania Wharton School raised concerns last week with his working paper — funded by the conservative think tank America Enterprise Institute — concluding the FHA would need roughly $50 billion to $100 billion in bailout in the coming years.
Galante pushed back against the claim Tuesday in a conference call with reporters frankly calling the findings wrong.
"It would take very significant declines in home prices in 2012 to create a situation where FHA would need additional support," Galante said. "There are no widespread opinions or signs that home prices would fall that far."
Should the FHA ever need to draw bailouts from the government, officials would have to work with the Office of Management and Budget at the Treasury Department to access funds. But Galante said the FHA would still have levers such as another premium boost to pull before they would have to go back to government vaults.
"Right now there is no reason for us to activate those conversations," Galante said.
The FHA's total liquid assets grew $800 million to $33.7 billion in fiscal 2011. That's $1.9 billion more than in 2009. Meanwhile continuing struggles in the housing market are affecting the worth of the fund, which was nearly cut in half to $2.6 billion. The FHA said it will continue to build loss reserves "to prepare for greater claims in the coming years."
The books of business built before 2009 continue to be the problem. Down payments on mortgages then were often funded by the lender. The final expected cost of those loans grew to $14.1 billion this year, according to the actuarial study sent to Congress, up from $12.3 billion the year before.
The 2010 and 2011 books of business, however, have a far greater credit quality. Galante said the average credit score of borrowers landed above 700 for the first time ever in 2011.
Write to Jon Prior.
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