Bailout Threat Lurks for FHA

Person lurking
A threat is lurking for the FHA. For the first time in 78 years, it could face a taxpayer bailout.

The results of an independent annual audit project that the Federal Housing Administration's (FHA) reserves are $16.3 billion less than the agency’s financial obligations for the current year.

The results, released last Friday, are worse than initial reports predicted. Legally, the FHA is supposed to hold reserves equal to two percent of its portfolio. But due to the high level of expected losses released in the report, the agency's reserves are the equivalent of negative 1.44 percent.

It released a statement report that the study does not “mean FHA has insufficient cash to pay insurance claims…or will need to immediately draw funds from the Treasury.”

The FHA stated that its need for Treasury funds will be decided in February 2013 when the Presidential Fiscal Year 2014 budget is released.

An immediate bailout is not expected, but the home loan crisis will remain on taxpayers' minds throughout the near future.

During the Great Depression, the FHA was created to restore confidence among banks and lending institutions and protect against the risk of borrower default. It grew as a strong institution, wavering in reasonable patterns, until the home loan crisis occurred. Mortgage giants Freddie Mac and Fannie Mae were recently bailed out by taxpayers and have since regained their strength in the economy.

Although the FHA escaped a bailout years ago, the fear of a home loan crisis remains today for the agency.

“FHA has weathered the storm of the recent economic and housing crisis by taking the most aggressive and sweeping actions in its history to reform risk management, credit policy, lender enforcement, and consumer protections,” HUD secretary Shaun Donovan said. “During this critical period in our nation’s economic history, FHA has provided access to homeownership for millions of American families while helping bring the housing market back from the brink of collapse to a point where the outlook is positive and recovery is underway.”

The FHA plans to raise premiums and sell delinquent loans in an effort to avoid the home loan crisis. The staggering financial obligations could worsen due the record low interest rates reported by Freddie Mac. The report states that protracted low interest rates could drive the agency's capital reserve to a deficit over $30 billion.

Parts of the projected deficit figures are due to the bad loans made several years ago — before the home loan crisis and crash.

FHA Acting Commission Carol Galante said the loans made during the Administration are the highest in the agency’s history.

“We take the finding of the independent actuary very seriously,” Galante said. “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.”