WASHINGTON — The Government Accountability Office is taking a closer look at the financially challenged Federal Housing Administration.
The GAO included a small discussion of the FHA's difficulties in an update to its review of "high risk" areas in the government released Thursday.
"Further actions could be taken to help restore the Federal Housing Administration's financial soundness," the watchdog office said.
Every two years, the GAO updates a list of vulnerable government functions, with additions, removals from the list and discussion of progress about preexisting items. This year, better management of climate change risks and challenges related to weather satellites were added.
The FHA was not added to the list of 30 "high risk" areas. Rather, the GAO modified a preexisting item related to "modernizing the outdated … financial regulatory system", which had been added during the crisis. The watchdog expanded the scope of its review of the regulatory system to look more closely at housing finance, including the FHA and the government-sponsored enterprises Fannie Mae and Freddie Mac.
"A new challenge for the markets has also evolved as the decline in private sector participation in housing finance that began with the 2007-2009 financial crisis has resulted in much greater activity by the Federal Housing Administration …, whose single-family loan insurance portfolio has grown from about $300 billion in 2007 to more than $1.1 trillion in 2012," the report said.
The FHA's greater presence during the crisis, which it has since sought to reduce, has sparked concerns among lawmakers about its fiscal soundness following an actuarial report showing huge projected losses associated with mortgage defaults. The report estimated a $16.3 billion capital deficit in the FHA's insurance fund based on reserves needed to cover losses over a 30-year period. That would bring the fund way below its mandate capital buffer, which the GAO recommended be strengthened, and has prompted fears the FHA may need a Treasury loan. (The agency has said it has $30 billion on hand to settle claims.)
"Although required to maintain capital reserves equal to at least 2 percent of its portfolio, FHA's capital reserves have fallen below this level, due partly to increases in projected defaults on the loans it has insured," the GAO said. "As a result, we are modifying this high-risk area to include FHA and acknowledge the need for actions beyond those already taken to help restore FHA's financial soundness and define its future role."
Rep. Jeb Hensarling, R-Texas, the chairman of the House Financial Services Committee who has led GOP criticism of the FHA, pounced on the report. "This reinforces everything our committee has been saying about the FHA for some time now — it is a high risk to taxpayers, it is a high risk to the mortgage insurance market and it represents a high risk to our economy," he said in a press release.
The report said the FHA's struggles "suggest that the 2-percent capital requirement may not be adequate to avoid the need for Treasury support under stressed scenarios."
It added that risk concerns about the government insurer could rise as policymakers consider broader reform to housing finance, including possibly a smaller role for Fannie and Freddie.
"Efforts to reduce the market presence of the enterprises could shift some borrowers currently served by that market segment to FHA, and the resulting impacts on FHA's risk exposure should be considered," the report said.
The report did cite progress in the broader review of the financial regulatory system, including passage and implementation of the Dodd-Frank Act, steps taken by the new Consumer Financial Protection Bureau, and development of new government authorities to wind down failed financial companies.