An annual audit set for release Friday projects that the federal agency that insures millions of home loans across the country could face losses of $16.3 billion, a figure that far exceeds earlier estimates and one that raises the specter that the Federal Housing Administration could need taxpayer aid for the first time in its 78-year existence.
In announcing the estimate, FHA officials were quick to point out that the dismal numbers do not mean the agency has a current operating deficit or “insufficient cash” to pay its insurance claims.
Rather, the agency noted that any decision to draw upon taxpayer funds would not come until early next year, when the Obama administration makes that determination in its annual budget. Officials also said an improving housing market and pending changes meant to shore up the agency’s reserve fund could put it on more solid financial footing in the years ahead.
“We take the findings of the independent actuary very seriously,” FHA acting commissioner Carol Galante said in a statement. “We will continue to take aggressive steps to protect FHA’s financial health while ensuring that FHA continues to perform its historic role of providing access to homeownership for underserved communities and supporting the housing market during tough economic times.”
Not everyone is confident about the agency’s health going forward.
Rep. Spencer Bachus (R-Ala.), chairman of the House Financial Services Committee, told reporters Thursday that the FHA “is running out of money for the first time in its history.”
Bachus said the agency is “burning through” its remaining reserves and soon will need a multibillion-dollar infusion of cash from the Treasury. “They have indicated they will have to come to the American people and ask for money,” he said.
In any case, the findings of the audit underscore how the wave of mortgage delinquencies and defaults — particularly the ones that the agency backed from 2005 to 2008 — have continued to batter the FHA’s bottom line and eroded the financial buffer that it has maintained throughout most of its history.
The law requires that the agency, which has played an outsize role in providing access to loans during the housing crisis, keep more than enough money in reserves to pay for projected losses. But the agency’s reserves have dwindled steadily in recent years.
Already, the government has spent nearly $140 billion bailing out mortgage giants Fannie Mae and Freddie Mac, which along with the FHA back the vast majority of new mortgages in the country. The FHA alone insures more than $1 trillion in loans.
The FHA’s mounting financial troubles have placed increased scrutiny on the agency, which was created in the wake of the Great Depression to help revive the nation’s housing market by providing the sort of insurance that would encourage banks to lend again.
It also has deepened the debate over the agency’s mission and how it should balance its objective of providing credit to first-time and low-income homeowners while keeping itself on solid financial footing.
The FHA has offset its costs in recent years in part by raising its mortgage-insurance premiums. It’s possible that the agency could continue to raise those premiums to bring in more revenue, though some critics say that approach punishes the very borrowers the FHA is tasked with helping.
Officials have long maintained optimism that taxpayer funding wouldn’t be necessary to back the agency, partly because of the FHA’s ability to raise premiums but also because improvements in the housing market could ease pressure on the FHA’s bottom line.
The agency noted Thursday that this year's audit used more conservative projections for home price appreciation. And the estimate did not include improvements in the housing market that have occurred since June. In addition, the agency said that historically low interest rates, while good for the broader economy, have cost the FHA revenue because borrowers often refinance or pay off their loans depriving the agency of premiums.
In fact, some previous projections have estimated that while the agency could exhaust its reserves in the short term, its financial situation could brighten over time as the housing market recovers. The Mortgage Bankers Association said in a release Thursday that overall mortgage delinquencies have declined during the past year and that “the total past due rate for FHA loans is now at its lowest level in over 10 years, and FHA’s post-2010 books are performing much better than loans originated prior to 2010.”
That said, foreclosure and delinquency rates remain well above historical averages. Federal Reserve Chairman Ben S. Bernanke said in a speech Thursday that while the nation’s housing market has seen marked improvement during the past year, the recovery remains “far from being out of the woods.”