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In testimony before Congress, Shaun Donovan acknowledges that FHA's reserves could be depleted if housing prices keep falling. But he says the agency has tools available to shore up its financial condition, if they become necessary.
December 1 -
Despite falling house prices and rising claims, the Federal Housing Administration's mortgage insurance fund clung to a slim capital ratio of 0.24% on its book-of-business for the year ending Sept. 30.
November 15
WASHINGTON — The Federal Housing Administration, in danger of exhausting its reserves as a result of the spike in mortgage default rates, plans to announce a new round of premium increases for home buyers within the next week.
The looming premium hikes are one of several new steps being taken by the Obama administration to shore up the FHA's finances and avoid a taxpayer bailout.
The administration's budget proposal, which was released Monday, projects that a key FHA account, which holds reserves that exceed expected losses, will be depleted in the next year.
That account has already fallen to $4.7 billion, which is below a standard established by Congress that requires the balance to remain above 2% of the FHA's total loan guarantees.
But Shaun Donovan, secretary of the Department of Housing and Urban Development, which includes the FHA, told reporters on a conference call Monday that the budget projection is already out of date.
"The estimate that's in the budget is wrong for a number of reasons," Donovan said.
He said that the budget proposal does not account for an additional $900 million to $1 billion that the FHA will receive from last week's mortgage settlement with five large banks and other looming settlements.
The budget does take into account premium increases that were enacted by Congress late last year as a way to pay for a short-term extension of the payroll tax cut. The legislation called for a 0.1 percentage point increase in premiums for single-family homes.
The administration's budget proposal raises that premium hike to 0.25 percentage points for loans over $625,000.
But the budget proposal does not account for the additional FHA premium increases that will be announced within the next week, according to Donovan.
The HUD chief added that the government is continuing to hold discussions with smaller mortgage servicers that did not sign onto the settlement announced last week. Any settlement proceeds that the FHA gets from those talks would be on top of the $900 million to $1 billion in expected proceeds.
"All of those combined make me confident that we are taking all the actions that we can at this time to protect the fund," Donovan said. "We're prepared to take further actions as well to protect the fund."
The Obama administration's budget projects that the FHA's capital reserve account will rebound to its 2% target level in 2015. The most important factor in that forecast involves an estimate on the future path of home prices, Donovan said.
