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Mortgage

FHA bailout pushes federal deficit to $22B

MMI fund to reach its capital ratio requirement by 2017

With the Federal Housing Administration drawing $1.7 billion from the Treasury into its Mutual Mortgage Insurance fund for the first time in FHA history, the balance of the fund ended up costing the federal government a hefty sum.

For the 2013 fiscal year, an increase in the estimated balance of the MMI fund raised federal spending and the deficit by $22.4 billion due to struggles within the single-family mortgage guarantee and Home Equity Conversion Mortgage (HECM) programs, the Congressional Budget Office said.

"Because the transfer is an intergovernmental shift of funds, it did not affect the deficit; however, the increase in the estimated cost of the FHA’s programs raised federal spending and the deficit by $22.4 billion in the fiscal year just ended," explained CBO analyst Chad Chirico and Susanne Mehlman.

Reviews of the financial status of the MMI Fund in recent years have raised some concerns that the fund could be exhausted, leading to a government bailout.

Recent estimates show the guarantees the FHA provided on single-family mortgages during the past two decades were more costly for the federal government than initially predicted.

With the single-family mortgage guarantees costing the federal government more than anticipated, the balance in the MMI fund has fallen over time.

The role of the FHA increased significantly following the housing crisis and the amount of FHA insurance in force continues to grow, increasing to more than $1 trillion in 2013 when compared to $400 billion before the housing meltdown, Keefe, Bruyette & Woods claims in a new report.

However, growth recently slowed, with higher FHA premiums pushing volume back to private mortgage insurers.

"While the FHA’s role is not directly being debated as part of government-sponsored enterprise reform, we believe it will need to be addressed along with broader mortgage market reform," argued KBW analysts Bose George, Jade Rahmani and Ryan O’Steen.

Since the FHA is required to maintain a minimum capital ratio of 2%, it must undertake actions to improve its ratio to that level — given that it’s current capital ratio is below 0.4%.

In an attempt to help improve the health of the MMI fund, FHA will now collect premiums on all loans for either the entire mortgage term or for at least the first 11 years of the mortgage, depending on the original loan term and loan-to-value ratio.

Additionally, FHA will seek to lower loss severities by utilizing alternatives to foreclosure.

While the overall health of the FHA’s MMI Fund remains fragile, the Department of Housing and Urban Development expects FHA to return to its minimum capital ratio requirement in 2017.

"We believe that stronger borrowers should be able to access credit through the GSE and this shift would move the FHA back to its more traditional role of serving borrowers who don’t have access to conventional mortgages," KBW concluded. 

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