The Federal Housing Administration, which lost $4.2 billion in 1988, continues to lose $350 million a year in its single-family loan programs and could be insolvent within 10 years, according to sources familiar with the contents of a new independent accounting study.
The long-awaited report by Price Waterhouse, to be released by the Department of Housing and Urban Development (HUD) today at a congressional hearing on federal housing insurance programs, estimated that the Mutual Mortgage Insurance Fund -- which provides single-family home loans -- had a net worth of $2.6 billion in 1989, down from $8 billion in 1979.
HUD officials have proposed drastic steps to blunt the effect of losses during the 1980s that have been blamed on regional economic downturns in the Southwest and HUD's lax administration of FHA loans.
HUD sources said Secretary Jack Kemp will ask Congress to impose a 0.5 percent loan assessment on FHA buyers who provide less than a 10 percent down payment on their homes, and to require those borrowers to pay two-thirds of the closing costs up front, in cash. FHA now allows buyers to finance closing costs, which can run to several thousand dollars, as a way to encourage home ownership among lower-income people.
Kemp also will propose that FHA not raise mortgage loan limits beyond the $124,875 limit in order to avoid providing them to people in higher income brackets.
But a spokeswoman for the mortgage insurance industry said the stringent new requirements could effectively limit the number of people who could qualify for FHA loans by erasing the advantages of going to FHA rather than to private banks. "It would serve to knock out many of the people the program was designed to serve," said Jane DeMarines of the Mortgage Bankers Association.
In testimony prepared for the Senate Banking Committee's housing subcommittee today, Kemp defended his new proposals as the only way to save FHA from certain disaster.
"The FHA reforms that I have described. . . are designed to achieve the absolute minimum that is necessary for FHA to be considered actuarially sound," he said.
Among those reforms:
The 0.5 percent mortgage premium for cash-poor buyers would be financed as part of the overall mortgage and be paid over a period of from four to 15 years, depending on the size of the borrower's down payment.
Borrowers putting less than 5 percent down would pay the assessment for the longest period of time, and the premium would be assessed in addition to an existing up-front payment of 3.8 percent that is now paid on FHA loans at the closing table.
Increasing the portion of closing costs that the buyers would be expected to pay, HUD sources said, would decrease the risk of default. Those buying homes that cost more than $50,000 would be required to invest at least 3 percent of the cost of their homes in order to obtain a loan.
On new loans, HUD would also pay no distributive shares -- the excess of premiums paid over losses -- to buyers at the end of their 30-year loans. There have been no such excesses or payments on loans written since 1979, but HUD will continue to refund the money for homebuyers with pre-1980 loans, at a cost of about $150 million a year.
The Mutual Mortgage Insurance Fund is the largest component of the FHA. HUD is also commissioning a nine-month study of the separate General Insurance Fund, which contains multifamily-housing insurance funds that have also been the source of costly defaults.
FHA fell victim to a number of unscrupulous loan underwriters and has been plagued by a backlog of unsold foreclosed properties during the last 10 years. HUD sources said Kemp will soon propose streamlining the property disposition process to lessen the backlog, which now costs HUD $500 million a year on carrying costs for 80,000 homes.
The Price Waterhouse study assumes a loss of 37 cents on the dollar on each of the foreclosed homes HUD must sell. HUD officials are estimating the proposed reforms will increase the fund's operating capital to 1.25 percent of its total insurance exposure, up from about 1 percent.