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Too Soon to Say FHA Will Need a Bailout

Major news outlets have been talking about the Obama Administration possibly requesting $943 million from the U.S. Treasury this year to shore up the finances of the Federal Housing Administration. But whether the 80-year-old agency will actually need the cash infusion is far from clear.

The $943 million figure is part of the Administration’s fiscal 2014 budget proposal, but it’s simply a projection based on current conditions. Whether the funds will actually be needed won’t be known until September, six months from now, when the current fiscal year ends.

Today’s headlines about the bailout stem not from the agency’s single-family mortgage portfolio but from its portfolio of reverse mortgage loans, which it calls home equity conversion mortgages (HECM). These are loans that enable seniors to draw a steady stream of monthly income by tapping the equity in their house. FHA backed almost 55,000 reverse mortgage loans in 2012, making it the biggest participant in the market by far.

FHA Commissioner Carole Galante has since taken steps to pare back the agency’s reverse mortgage risk. Among other things, the agency has reduced its insurance exposure by eliminating its standard, fixed-rate reverse mortgage product, reducing the maximum amount of funds available to borrowers.

Agency Has Played Big Economic Role

The agency has really been the unsung hero of the housing market since the downturn hit several years ago, and the pressure on its reserves is the price the federal government has been paying to help keep mortgage funding flowing to first-time buyers and moderate-income households while private lenders have pared back their lending in the conventional market through tightened underwriting standards.

Unlike in the conventional market, during the housing boom FHA never loosened its underwriting standards and its financial position remained strong during the downturn, which made it one of the most stable participants in the mortgage market after the crash.

Its market share grew considerably during that time while it took up much of the slack left by the private market. Part of its growth was also driven by federal policy changes that enabled hard-hit home owners to replace their troubled mortgages with safe FHA financing. As home values plummeted in 2005 and 2006, the FHA mutual mortgage insurance fund, the agency’s main vehicle for backing single-family mortgages, came under pressure. But FHA was still able to retain its reserves for its congressionally required 30 years. (FHA also maintains a congressionally required 2-year surplus reserve account.)

FHA has since taken a number of steps to keep its finances healthy. These include increases in its upfront and monthly premium structures and tightening its enforcement over bad lenders.

The result has been a remarkable run. At a time when the two secondary mortgage market companies Fannie Mae and Freddie Mac were using Treasury funds to keep them operating after the federal government put them in conservatorship, and many of the country’s largest banks were taking assistance under the Troubled Asset Relief Program (TARP), FHA continued to operate under its own reserves.

Of course, even FHA came under pressure when home prices were seeing steep declines, and for a while last year it looked like the agency would need to tap Treasury funds to keep its reserve accounts fully funded, but in the end the improving housing market made that unnecessary as rising home values relieved much of the pressure on its reserves. The agency also received a one-time payment as its share of the National Mortgage Settlement. The National Mortgage Settlement is the 2012 agreement between five of the country’s largest banks and the federal government to address widespread problems found in the way the banks were processing their foreclosures.

The agency still has years of reserves left to meet all of its exposure should its entire portfolio of loans go bad. What it doesn’t have is the full 30-year requirement (plus the 2-percent surplus requirement), which is far beyond what banks and other financial institutions have to keep on reserve.

Lawmakers in the House are even looking at whether it’s time to reconsider the 30-year reserve requirement for the agency. Rep. Michael Capuano (D-Mass.), ranking member of the House Financial Services Subcommittee on Housing and Insurance, has introduced legislation to modify the 30-year reserve requirement. Rep. Maxine Waters (D-Calif.), ranking member on the full House Financial Services Committee, suggested in a recent hearing that it’s time for Congress to look hard at the requirement.

Were the requirement in fact eliminated, much of the pressure on FHA’s reserves would be relieved and the agency would be treated more closely to the way other financial institutions are treated.

Bottom line: The FHA has absorbed a lot of the problems in the housing market over the years and as of today it remains one of the lone housing finance agencies to come through the financial crisis without a bailout.

In the 90-second video above, House Financial Services Committee Ranking Member Rep. Maxine Waters (D-Calif.) asks NAR President Gary Thomas whether it’s time to revisit the 30-year reserve requirement for FHA. The question was posed during an April 10 hearing on the state of FHA. President Thomas was one of the panelists at the hearing, held by the committee’s housing and insurance subcommittee. Thomas said the requirement should be looked at.

Robert Freedman

Robert Freedman is manager of multimedia communications for the NATIONAL ASSOCIATION OF REALTORS®. He can be reached at rfreedman@realtors.org.

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