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Experts pull back reins on FHA bailout rumors

Will FHA reform immediately follow the shortfall? Doubtful.

Rumors swirling around Capitol Hill suggest the Federal Housing Administration will need a Treasury bailout for the first time in 80 years when this fiscal year ends.

It came as no surprise that lawmakers who stand against the current structure of the FHA immediately responded to the rumors, including Rep. Scott Garrett, R-N.J.

Garrett is one of several policymakers behind an ongoing push to reform the FHA.

However, before the market begins to panic, many mortgage experts believe rumors of a potential bailout are 'seriously exaggerated.'

"Anything that happens is a temporary and technical shortfall," explained The Collingswood Group partner and managing director Tim Rood.

He added, "It will certainly not reach a magnitude for any type of reform to actually happen."

In April, the Obama Administration projected that the FHA would need a bailout to cover $943 million in losses during the current fiscal year as a result of mortgage-related losses.

At the time, FHA Commissioner Carol Galante admitted a bailout may be required in the future, but the agency has yet to reach that point.

While the situation is still fluid, it appears the temporary shortfall will fall in the $1 billion-ballpark, according to Compass Point.

"We believe that from a practical perspective the only thing an FHA draw would increase is the political rhetoric surrounding the issue and our sense remains FHA reform is unlikely to become law in the medium-term," explained Compass Point policy analyst Isaac Boltansky.

While some believe that an FHA draw could be a catalyst for FHA reform, the chance of real reform occurring is slim-to-none due to the mechanics of a potential draw and the political dynamics currently surrounding the mortgage finance debate.

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

Additionally, FHA reform is a bigger piece of the broader mortgage finance reform debate and will be considered on a standalone measure.

"It’s unlikely to create enough energy or momentum to create any type of reform," Rood stated. "Particularly since the only real reform we’re looking at is the PATH Act, which has no chance of making it to the floor."

House Republicans have included FHA reform in the Protecting Americans Taxpayers and Homeowners Act, and Compass Point does not expect movement on any other FHA-related bills until this proposal can be considered in full.

"Our viewpoint was reinforced by comments from House Financial Services Committee Chair Jeb Hensarling, R-TX, who responded to the FHA news stories," Boltansky pointed out. Hensarling is cited as saying: "It’s time to return the FHA to its traditional mission of helping first-time homebuyers and those with low-to moderate-incomes, and that’s exactly what the PATH Act does."

It seems unlikely, FHA reform — depending on its specifics — will have an impact on homeowners since the agency has roughly 20% of the new home purchase market, analysts said.

The National Association of Realtors remains a strong supporter of the FHA even though the agency continues to face challenges.

"We believe it is imperative to get the fund back on stable footing and we are committed to working with the agency and our Congressional allies to further actions and legislation that will help aid the FHA’s long-term recovery so that it can continue to serve the home buying needs of Americans," NAR president Gary Thomas concluded. 

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