Housing Agency Close to Exhausting Reserves
Stolen from the Wall Street Journal November 14, 2012.
By NICK TIMIRAOS
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. That could result in the agency needing to draw on taxpayer funding for the first time in its 78-year history.
The FHA's tenuous financial condition would put a spotlight on an often-overlooked housing-market rescue. The New Deal-era agency, which doesn't actually make loans but instead insures lenders against losses, has played a critical role stabilizing the housing market by backing mortgages of borrowers who make down payments of as little as 3.5%—loans that most private lenders won't originate without a government guarantee. The FHA accounted for one third of loans used to purchase homes last year among owner occupants.
Already, the Obama administration has taken a series of steps to stabilize the housing sector since the 2008 financial crisis, including $137 billion spent to bail outFannie Mae FNMA +3.00% and Freddie Mac FMCC +4.10% . Together with those two companies, federal agencies are backing nearly nine in 10 new mortgages.
The FHA guarantees fewer mortgages than either Fannie or Freddie, but it now has more seriously delinquent loans than either of the mortgage-finance giants. Overall, the FHA insured nearly 739,000 loans that were 90 days or more past due or in foreclosure at the end of September, an increase of more than 100,000 loans from one year ago. That represents around 9.6% of its $1.08 trillion in mortgages guarantees.
The FHA's annual audit estimates how much money the agency would need to pay off all claims on projected losses, against how much it has in reserves. Last year, that buffer stood at $1.2 billion, representing around 0.12% of its loan guarantees. Federal law requires the agency to stay above a 2% level, which it breached three years ago.
The decision over whether the FHA will need money from Treasury won't be made until next February, when the White House typically releases its annual budget. Because the FHA has what is known as "permanent and indefinite" budget authority, it wouldn't need to ask Congress for funds; it would automatically receive money from the U.S. Treasury.
A spokesman for the Department of Housing and Urban Development, which oversees the FHA, declined to comment.
The FHA never relaxed its underwriting rules during the housing boom, and its market share plunged as private lenders offered loans on much easier terms. But the agency saw business soar as the housing bust deepened, first in 2007, as private lenders retreated, and later in 2008 and 2009, as Fannie and Freddie tightened credit standards.
Most of the agency's losses now stem from loans made as the housing bust deepened. Around 25% of mortgages guaranteed in 2007 and 2008 are seriously delinquent, compared with around 5% of those insured in 2010.
Even though the agency's newer loans are expected to be profitable, the financial difficulties are likely to set off a political fight in Congress over how to scale back the government's role in housing.
Throughout the downturn, the FHA has struggled with calibrating the balance between protecting taxpayers and providing credit. Economists have argued that constricting the agency's role in the teeth of the housing crisis would only have exacerbated losses across the board. "We would be talking about Great Depression II instead of the Great Recession," says John Burns, who runs a homebuilding consulting firm in Irvine, Calif.
"They stepped in at a time when the other instruments of policy weren't available. You couldn't lower interest rates enough to get people to obtain private mortgages," says Douglas Holtz-Eakin, president of the American Action Forum, a conservative economic think tank, and a former director of the Congressional Budget Office.
Still, Mr. Burns says the FHA has appeared too timid at times to raise insurance premiums, particularly in an environment where mortgage rates are very low.
In each of the last three years, Obama administration officials have shot down the idea that the agency would draw on the Treasury, except under the most dire home-price forecasts. As recently as this past February, when the White House's budget forecasts showed that the FHA was in the red by nearly $700 million, officials said that pending legal settlements with large banks would plug that hole.
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.
Republicans in Congress, however, could push for more aggressive action, including reducing maximum loan limits, raising minimum down payments, or limiting FHA-backed loans to borrowers below certain incomes. Those steps would return the agency to its historic role of providing credit to first-time home buyers and under-served communities.
The government agency has fewer tools to manage risk than loan giants Fannie and Freddie, even though Congress last year allowed the agency to back certain loans that are bigger than those eligible for purchase by Fannie and Freddie.
"It's as if we were allowed to pick one branch to defend us in a war, and we picked the Coast Guard," said Anthony Sanders, a housing-finance professor at George Mason University in Fairfax, Va. "They're just not up to this task."
Write to Nick Timiraos at Nick.Timiraos@wsj.com
