The Federal Housing Administration plans to tap $1.7 billion in taxpayer money at the end of the month to cover its losses — a first for an agency that has been self-sustaining since its 1934 creation.
The FHA has played a pivotal role in propping up the housing market by backing low-
down-payment loans for borrowers after the mortgage market unraveled and other lending sources dried up. It accounts for nearly 20 percent of all home-purchase mortgages.
The agency does not make loans; it insures lenders against losses should loans go bad. It has always used the fees it charges borrowers to cover losses.
But Friday, the FHA informed Congress that it will draw $1.7 billion from the Treasury — nearly double the amount the White House forecast in April — to shore up its funds and maintain a required cash cushion. In a letter, FHA Commissioner Carol Galante told lawmakers that the $30 billion the agency has in its reserves will not be enough to cover expected losses for the next 30 years.
The shortfall is driven mainly by a $5 billion loss in the FHA’s reverse-mortgage program, which allows seniors to withdraw equity from their homes. A jump in mortgage rates in June and higher borrowing fees imposed by the agency also cut into the FHA’s revenue by slowing demand for the agency’s loans, senior Obama administration officials said.
The agency is financially stronger than the shortfall would suggest, and government data to be released soon will reflect recent improvements, the officials said.
“They have more than enough right now to pay any claims over the next decade plus,” said David Stevens, the previous head of the FHA and current president of the Mortgage Bankers Association. “The other key point is that all of the conditions affecting the FHA portfolio have improved dramatically this year.”
The development is likely to reignite debate about the government’s participation in the housing market. The administration said it recognizes that the FHA is playing an outsize role and needs to retrench modestly. But some lawmakers want to shrink its footprint more dramatically.
“Taxpayers have already been forced to provide hundreds of billions of dollars to [mortgage-finance companies] Fannie Mae and Freddie Mac,” Sen. Mike Crapo (Idaho), the Senate banking committee's ranking Republican, said in a statement. “FHA requiring nearly $2 billion for this year suggests that predictions of billions more in taxpayer liability could come to fruition if we do not act on serious reform now.”
Rep. Jeb Hensarling (R-Tex.), chairman of the House Financial Services Committee, has called the agency the “nation’s largest subprime lender,” saying that it is backing poor-quality loans.
But the agency’s supporters say the data show the opposite.
FHA officials have maintained that rogue lenders with aggressive tactics migrated to the FHA after the subprime market collapsed, attracting borrowers with unusually poor credit histories to the agency’s books in 2007, 2008 and early 2009.
Default rates shot up as those loans matured. The agency responded by tightening its lending standards and increasing borrower fees. The FHA has raised premiums five times since 2009. In June, it began charging annual premiums for the life of a loan. Previously, the premiums applied for a far shorter period.
As a result, the FHA has better-quality borrowers, its supporters said, citing government data. The average credit score for FHA borrowers is 693, up from 620 during the financial crisis, according to agency’s data. Also, the number of borrowers who have fallen behind on their loans within the first six months of origination has declined 90 percent since the 2007 peak.
“FHA’s new borrowers are not FHA’s problem,” said Jim Parrott, a former housing adviser in the Obama White House. “If anything, FHA lending is too tight, not too loose. If you tighten further and shut down the pipeline when FHA still commands a big presence in the market, you threaten the housing recovery and do a world of damage to FHA’s finances.”
The only real threat to the agency’s revenue is the number of borrowers who are leaving, most likely for better deals, said Brian Chappelle, a banking consultant and former FHA official.
The number of homeowners who have paid off their FHA mortgages — either by refinancing into another product or selling their homes — has hit the highest level since fiscal 2004, Chappelle said.
“They may soon suffer from adverse selection because all the good borrowers are the ones that can refinance into other loans,” he said.
Senior administration officials said the draw on the Treasury does not reflect the FHA’s financial health but rather the constraints in a complex funding mechanism. The FHA, for example, is the only agency that must maintain a certain cash cushion beyond what is needed to cover its near-term losses, the officials said.
In December, the agency had to project how much it would need to cover its costs through Sept. 30, based on forecasts for home prices, default rates and other factors. A budgetary rule bars the FHA from updating those forecasts to reflect improvements in its performance. If those factors were adjusted to capture current conditions, the $1.7 billion draw would not be necessary, the officials said.
The FHA expects this to be a one-time event, especially since the agency is revamping the biggest drag on its finances: the reverse-mortgage program. A law adopted in August allows the FHA to restructure the program. Its flagship home-buying program, which accounts for most FHA loans, showed improvement and generated about $4 billion this fiscal year, the administration said.