With all the talk about the Federal Housing Administration’s request for a $798 million subsidy for the HECM program, government officials are starting to voice their concern over FHA as a whole as many feel its reserves could fall below the level demanded by Congress.
Edward Pinto, a mortgage-industry consultant and former chief credit officer at Fannie Mae, told the Wall Street Journal that, "They’re probably going to need a bailout at some point because they’re making loans in a riskier environment… I’ve never seen an entity successfully outrun a situation like this."
Over the last two years, the number of loans insured by FHA has soared, with its market share to 23% in the second quarter, up from 2.7% in 2006, according to Inside Mortgage Finance.
However, a senior official at HUD, told the WSJ that there is "no risk" that the FHA would require money from Congress if the ratio falls below 2%. Asked about the agency’s capital ratio, the official said a report detailing that number won’t be completed until the FHA’s fiscal year ends Sept. 30.
Rising defaults have eaten through the FHA’s cushion. Some 7.8% of FHA loans at the end of the second quarter were 90 days late or more, or in foreclosure, according to the Mortgage Bankers Association. That is up from 5.4% a year ago.
Like the HECM program, resulting FHA losses are offset by premiums paid by borrowers and Federal law says the FHA must maintain, after expected losses, reserves equal to at least 2% of the loans insured by the agency. The ratio last year was around 3%, down from 6.4% in 2007.
After the WSJ article was published, FHA Commissioner David Stevens said that the agency would not need a congressional subsidy even if its capital reserve ratio fell below 2%. In a statement Stevens said:
"Even if that level falls below 2 percent, FHA continues to hold more than $30 billion in its reserves today, or more than 5 percent of its insurance in force. Given this reserve level, FHA will not need a congressional subsidy even if the congressional capital reserve calculation falls below 2 percent."
