Now The FHA Is Going To Need A Bailout

The taxpayers have already bailed out Fannie Mae and Freddie Mac to the tune of about $137 billion. Now the FHA is coming to the trough. Between the three entities approximately 9 out of 10 mortgages are backed by we the taxpayers.

The Federal Housing Administration will exhaust its capital reserves and faced a deficit of $13.5 billion at the end of September, according to the agency’s independent annual audit set for release on Friday.

The report shows that the agency’s reserves aren’t adequate to pay for expected losses on the $1.1 trillion in loans that it guarantees, which means the agency is likely to require taxpayer funding for the first time in its 78-year history. ….

The FHA, which doesn’t actually make loans but instead insures lenders against losses, has played a critical role helping the housing market by backing mortgages of borrowers who make down payments of as little as 3.5%.

Rising losses are largely a result of less optimistic estimates about home prices and revisions to the models that the FHA’s independent auditor uses to project how much the agency is likely to pay for loans that default.

The FHA is required by law to maintain reserves equal to 2% of its total loan guarantees. It breached that level three years ago, and last year its reserves stood at 0.1% of all loan guarantees. (Read More)

What’s worse is that the FHA doesn’t even have to go to Congress for a bailout, because “the FHA has what is known as “permanent and indefinite” budget authority, it wouldn’t need to ask Congress for funds; it would automatically receive money from the U.S. Treasury.”

So, how did the FHA get into such a mess? James Pethokoukis explains:

This isn’t your granddaddy’s FHA. Back in the 1930s, it insured 20-year term loans combined with a 20% down payment. What’s more, FHA lending was backed by a rigorous property appraisal process. Not surprisingly, defaults resulting in claims were super low. From 1934 through 1954, notes AEI’s Ed Pinto, the FHA insured 2.9 million mortgages. During this period, FHA paid claims on 5,712 properties for a cumulative claims rate of 0.2%.

But these days, Timiraos writes, it’s backing borrowers with downpayments “of as little as 3.5%—loans that most private lenders won’t originate without a government guarantee.” And although it guarantees fewer mortgages than Fannie or Freddie, it has more seriously delinquent loans than either of them. (Read More)

He goes on to note that if the FHA was a private insurer it would be insolvent at this point, and how Congress made the problem worse by increasing the FHA loan limit to a whopping $729,750.

Yet somehow people think the politicians that created this housing mess are going to do great things for health care? It boggles the mind.