FHA Seeks to Avoid Bailout with Loan Sales, Higher Premiums
The agency's annual independent actuarial report is expected to show that its capital reserves have been depleted by rising levels of defaults. FHA could shore up its finances by increasing its enforcement against banks and other lenders, but it may also need to tap the Treasury for the first time in its history.November 13
While standards for issuing government-backed loans have clearly tightened for borrowers with spotty credit, bankers report the criteria for someone with a good credit score mirrors standards used before the crisis.October 31
The agency is desperately trying to avoid a bailout this year by settling disputes with major banks for cash, selling severely delinquent loans and raising insurance premiums for new borrowers.August 9
The Federal Housing Administration said Friday that it will hike insurance premiums, accelerate short sales and aggressively sell off defaulted loans to plug a $16.3 billion shortfall in its capital reserves.
FHA Acting Commissioner Carol Galante outlined the series of steps after an independent audit found that the agency's capital reserve ratio — which measures reserves held in excess to cover projected losses — fell into negative territory at, -1.44% at Sept. 30. By law, FHA must maintain at least a 2% capital reserve.
With the moves, the FHA is hoping to avoid tapping the U.S. Treasury for funding for the first time in its 78-year history.
The capital cushion has been depleted by high levels of defaults on FHA-backed loans. While FHA currently has reserves of $30.4 billion, the projected payout on claims — mostly on loans insured between 2007 and 2009 — will be $46,7 billion, according to the audit report released Friday.
In a statement, Galante said that the agency "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."
The agency's fiscal woes are likely to spark a contentious battle in Washington over how to shore up its finances. While premium hikes will bring in more revenue, they will also increase mortgage costs for borrowers, which could anger some housing advocates.
The concern for bankers and mortgage lenders, meanwhile, is that FHA will increase its buyback requests as the agency scrambles for new sources of revenue. FHA was able to avert a financial crisis earlier this year only by negotiating a $1 billion settlement with Bank of America (BAC) to compensate the agency for past losses.
Some housing advocates say FHA has been slow to make changes that have already been adopted by Fannie Mae and Freddie Mac.
"FHA needs to get more serious about loss mitigation and make sure they are putting people in modifications or providing alternatives like streamlining the short sale process," says Julia Gordon, director of housing finance and policy at the Center for American Progress.
Frank Keating, the president and CEO of the American Bankers Association, called the independent audit "troubling" and said FHA must find ways to avoid a taxpayer bailout.
"Achieving that goal must be done in a way that does not drive private lenders from participating in the FHA program by making the process overly bureaucratic and lacking in certainty," Keating said in a statement.
This time last year, the independent audit projected that the FHA's capital reserve ratio at Sept. 30 would be 0.24% — below the 2% requirement but well above the -1.44% ratio reported Friday. John Weicher, a senior fellow at the Hudson Institute and former FHA commissioner, said last year's audit report was based on a rosy economic forecast from Moody's that did not actually materialize.
"The economy performed worse than they expected a year ago so a lot depends on house price and interest rate changes in the next year, as well as losses on foreclosures," says Weicher.
To bolster its capital reserves, Galante said FHA will raise annual insurance premiums by 10 basis points, which would come on top of an upfront 75 basis-point increase in April, to 1.75% of the loan amount. FHA expects to bring in $11 billion in additional capital in fiscal 2013 due to the higher insurance premiums, though that amount was not included in the independent audit's estimate.
An increase in annual insurance premiums will make FHA loans slightly more expensive, adding about $13 a month to the average borrower's payment. It is unclear whether higher premiums will have an adverse impact on FHA's core constituency of low and moderate-income borrowers.
Among other changes, FHA will ramp up bulk loan sales to 10,000 per quarter in the next year through its Distressed Asset Stabilization Program.
The agency will expand the use of short sales and revise its loss mitigation program to provide more relief to struggling borrowers so they avoid costly foreclosures.
FHA also is reversing a policy that allowed borrowers to stop paying premiums after a certain point even though FHA's insurance guarantee remained in effect for the 30-year life of the loan. That policy left many borrowers without insurance to cover losses, Galante said.
This year's audit used a different methodology to predict how losses on defaulted loans and reverse mortgages would impact FHA's mutual mortgage insurance fund. The changes were based on previous recommendations made by the Government Accountability Office and the Department of Housing and Urban Development's Inspector General.
Last year's report had higher forecasts for home price appreciation and FHA says the turnaround in the housing market occurred later than was projected last year. FHA's revenue also took a hit from the continuing decline in interest rates because more borrowers paid off their loans by refinancing.
Though loans insured since 2010 are providing billions in new revenues, and serious delinquencies from 2005 to 2009 are declining, they are not enough to cover the $70 billion in losses on loans made during the height of the housing boom.
FHA's capital reserve ratio has turned negative before, in both 1990 and 1991, but the FHA came up with the necessary funds and did not have to tap the Treasury.