There’s been considerable interest in the media in FHA’s financial position. The agency recently announced several increases to the premiums it charges borrowers to have their mortgage guaranteed by the agency. Those increases, along with some reports that FHA might request federal funds to shore up its reserves, make it seem like the agency is navigating a rocky period.
It is, but the agency is acting prudently and won’t need an influx of taxpayer funds this fiscal year, so its 78-year record of never having to request funds remains intact. Nor is there reason to believe right now they’ll need to ask for funds in fiscal 2013 or beyond, analysts say.
On the premium increases, the 0.10 percent hike that takes effect April 1 is mandated by law as part of the bill Congress passed at the end of 2011 to extend the payroll tax vacation. That bill required an increase in the guarantee fee that Fannie Mae and Freddie Mac charge banks for guaranteeing loans. Congress included the FHA increase in the bill, too, at least in part to create parity with Fannie and Freddie, NAR analysts say.
Another FHA premium increase, of 0.25 percent, is limited to jumbo loans, and another increase, of 0.75 percent, is specifically for helping the agency’s reserves.
With these increases and with funds the agency will receive from the “robo-signing” settlement with large banks the federal government announced a few weeks ago, the agency has enough funds to replenish its reserves for fiscal year 2012, NAR analysts say.
Does this mean FHA will be in trouble again next fiscal year, which starts in October? NAR analysts say it’s too soon to tell. The recent drain on the agency’s reserves stems in large measure from the loans originated shortly after the housing downturn, when the availability of mortgage financing was at its worst and borrowers flocked to the agency. It’s now working through those loans. But looking ahead, things probably won’t be so bad, in part because the loans it backed from mid-2009 to now are among its strongest ever, so defaults could drop accordingly.
In any case, the pressures on the agency’s reserves aren’t just from defaults; they’re from continuing weakness in home prices. As long as prices stay weak, the agency has to hold more money in its reserves. So, the pressure on reserves isn’t solely because of losses but because of high reserve requirements in the face of struggling prices.
More fundamentally, it’s easy to lose sight of just how much in reserves the agency has. Unlike banks, which hold one year of reserves for the loans they carry, FHA has to hold 30 years’ worth. So, when the agency says its reserves are dipping, that dipping is happening in the context of reserves equivalent to 30 years for each of the mortgages it covers. That means its reserves amount to something like almost $38 billion. That’s money it still has.
On top of that, FHA maintains a second reserve account of 2 percent of its 30-year reserve amount. It’s this 2-percent reserve that’s been dipping.
So, to put this all in perspective, the agency continues to have tens of billions of dollars, but while it’s working through the loans it supported right after the mortgage crisis, it’s feeling pressure on its 2-percent reserve account, and part of that pressure comes not from losses but higher reserve requirements while prices stay dormant.
Once the agency works through this tough period, NAR would like to see it revisit its fee increases and lower them as appropriate.