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With FHA Audit Looming, Experts Say Prepare for Bumpy Ride

The Federal Housing Administration is expected to make changes upon announcing the results of its annual independent financial audit, due this week. In advance of the audit, an annual report produced by an independent third party, many experts have speculated to press how the analysis may pan out. The conclusion: it’s not a pretty picture. 

The conclusion, although premature pending the audit, is one shared by panelists at a housing policy meeting held last week by the Urban Institute during which experts stated that FHA is “in peril.” Bloomberg News also based this conclusion on the input of anonymous sources last week. 

While the FHA has never before required a “bailout” due to its financial performance, this year could mark the first year for FHA to seek assistance from the Treasury in order to shore up its mutual mortgage insurance fund—an action that can be taken without approval from Congress. 

Through a series of “leaks” and input sourced to major financial publications by “those familiar with the report,” FHA may have indicated indirectly that change is ahead. 

“The Federal Housing Administration is expected to report later this week that it could exhaust its reserves because of rising mortgage delinquencies, according to people familiar with the matter,” the Wall Street Journal wrote Wednesday. “That could result in the agency needing to draw on taxpayer funding for the first time in its 78-year history.”

The agency has been publicly mum on the status of its capital reserve fund, which it is required to maintain at 2% or more of its outstanding loan balance. Last year, it reported reserves of .12%, still maintaining a positive reserve ratio, but hovering close to negative territory. 

Through a windfall granted as part of a widespread mortgage settlement, FHA received roughly $1 billion this year, funds it said helped improve its capital position. It also raised premiums toward this same effort. But if speculation serves true, FHA could be poised to make more changes as well. 

“Administration officials could announce a series of measures that would either avert the need to draw on Treasury funds or cushion the blow of such a move, such as raising mortgage-insurance premiums and finalizing additional legal settlements with lenders, according to people familiar with the matter,” WSJ wrote. 

American Banker, in its report on the upcoming audit, noted potential change as well that would go beyond the change FHA has already made. 

“FHA also could announce changes of its own on top of insurance premium increases it made in April,” American Banker’s Kate Berry wrote Tuesday. “Meanwhile, bankers and mortgage lenders could be facing more buyback requests from the FHA as the agency scrambles for new sources of revenue.”

What the audit will reveal regarding FHA’s reverse mortgage portfolio remains to be seen, although the agency has stated publicly through its Deputy Assistant Secretary Charles Coulter that program changes are imminent. Last year’s audit indicated the Home Equity Conversion Mortgage program received a transfer of $535 million from its MMI capital reserve account to meet shortfalls, but was projected to meet its future liabilities and did not need support from the overall fund. 

The report is expected to be released by the week’s end.  

Written by Elizabeth Ecker

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