HUD secretary defends efforts to stabilize FHA’s finances

Rick Bowmer/AP - The FHA, created during the Great Depression, currently insures about $1 trillion in mortgages.

U.S. Housing and Urban Development Secretary Shaun Donovan will head to Capitol Hill on Thursday to talk about a different sort of fiscal cliff: the one potentially facing the Federal Housing Administration.

The Senate Banking Committee hearing comes three weeks after an independent annual audit showed that growing losses from mortgage delinquencies could force the FHA to seek taxpayer aid for the first time as soon as next year.

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Donovan acknowledges in prepared remarks that the recent findings were “obviously of very serious concern,” but he also told lawmakers that the FHA was taking concrete steps to put itself on a firmer financial footing and that improvements in the economy would bolster that effort.

“We will continue, as we have throughout this Administration, to be diligent in taking every action appropriate to protect taxpayers while continuing to ensure that FHA supports the stabilization of the housing market,” Donovan will say, according to his prepared remarks, adding that the FHA “has acted as a vital stabilizing force when an economic crisis precipitated by the housing market could have resulted in this country’s second Great Depression. Our job now is to be good stewards of taxpayer dollars and ensure FHA can continue be a source of opportunity and access to homeownership for future generations.”

The FHA, created during the Great Depression to help revive the nation’s crippled housing market by providing the kind of backstop that would encourage banks to lend again, insures about $1 trillion in mortgages.

Last month’s independent audit revealed that mounting losses on FHA-backed loans — particularly those backed between 2007 and 2009 — have left the agency’s reserves with a projected $16.3 billion deficit as of Sept. 30.

The findings renewed calls for an overhaul of the nearly 80-year-old agency and added urgency to the broader debate about how to restructure the government’s overall role in the nation’s housing market.

The FHA’s “finances point to a fundamental problem that requires urgent remedy,” banking analyst Karen Shaw Petrou recently wrote, adding that its precarious financial state should spur lawmakers to revamp the agency along with government-backed mortgage giants Fannie Mae and Freddie Mac.

Government officials have been quick to note that the latest projections at the FHA don’t account for rising house prices in recent months or revenues the agency expects to collect in the future. Agency officials also stressed that it has no immediate cash flow problem and that improvements in the housing market coupled with various policy changes could make an infusion of taxpayer money unnecessary.

In releasing the independent audit results last month, the FHA announced plans to again raise mortgage-insurance premiums and take a handful of other steps as part of an effort to shore up the agency’s finances.

The move would mean new borrowers of FHA-backed loans would pay an average of $13 more per month in premiums, officials said. Such an increase would help the agency boost its revenues, but it also could make mortgages more expensive for some of the low-income borrowers the FHA was designed to help.

If losses continue to mount and the projected shortfalls persist, the FHA could need help from taxpayers as soon as next fall. The need to draw from Treasury funds is based not on the recent audit but rather on projections in the Obama administration’s budget proposal, scheduled for release in February. A final determination on whether to request aid would come in September.

 
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