FHA faces $1.3 billion capital shortfall, audit finds

December 13, 2013

The Federal Housing Administration, which recently received an infusion of funds from the Treasury to cover projected losses, still faces a $1.3 billion capital shortfall, an independent audit released Friday found.

The annual analysis calculates the solvency of the FHA’s mortgage insurance fund under a range of economic assumptions.

FHA Commissioner Carol Galante declined to comment at a briefing for reporters on whether the agency might need a second straight taxpayer subsidy. The government mortgage insurer received a $1.7 billion infusion from Treasury in September, the first time it has needed aid in its 79-year history.

The report could raise concerns about the prospect of more taxpayer dollars being tapped to stabilize the housing sector, which was at the epicenter of the 2007-09 financial crisis and recession. Nevertheless, it showed the FHA’s finances improving from the $16.3 billion shortfall that was projected a year ago.

The Obama administration will make an initial determination on whether the FHA will need to access its Treasury credit line in February, when it releases its annual budget proposal. A final determination will not be made until the fiscal year draws to a close in September.

The FHA insures a portfolio of more than $1 trillion in mortgages. It increased its share of the market when the housing bubble burst, more than tripling its loan portfolio. It now insures almost one-third of all U.S. mortgages, up from about 5 percent in 2006.

It has struggled to manage a growing glut of delinquent mortgages, and loans it backed from 2007 to 2009 have eaten away at its cash reserves. According to the audit, loans made since 2010 are expected to remain profitable.

“The health of the [insurance fund] is improved,” Galante said. “We want to keep and maintain this momentum.”

Rep. Jeb Hensarling (R-Tex.), who heads the House Financial Services Committee, seized on the audit to argue the need to reduce governmental involvement in housing.

“A broke FHA is a broken FHA,” he said. “The American people want to end the destructive cycle of boom, bust and bailout that Washington housing policies have helped foster.”

Democrats noted that the agency’s financial health was improving, and said it must work to ensure that affordable loans are available for first-time home buyers.

David Stevens, president of the Mortgage Bankers Association and a former FHA commissioner, said the agency’s troubles could soon be behind it.

“Today’s report, while recognizing FHA’s current shortfall, shows clear improvement over last year and is a sign that the [insurance fund] is headed in the right direction and could soon be positive,” he said.

The FHA is legally required to maintain a 2 percent capital ratio, which is a measure of its ability to withstand losses. It has not met that mark since 2009, but the audit said it would in the 2015 fiscal year, sooner than was estimated last year.

With an FHA-backed loan, buyers can put down as little as 3.5 percent of the purchase price. The FHA, which does not make loans, provides mortgage insurance to borrowers who are unable to make a large enough down payment to qualify for prime loans.

The FHA has taken a series of steps to improve its finances over the past few years. It has raised the amount it charges borrowers to insure mortgages against default six times and has tightened underwriting.

The policy changes, coupled with rising home prices and improved rates of recovery on delinquent loans, are helping to shrink the projected funding gap, Galante said.

— Reuters

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