Federal Housing Administration Nears Need for Taxpayer Funds

November 27, 2012

The Federal Housing Administration (FHA) is expected to report that it could exhaust its reserves because of rising mortgage delinquencies, a development that could result in the agency needing to draw on taxpayer funding for the first time in its 78 year history, says the Wall Street Journal.

  • Created during the New Deal, the FHA insures lenders against potential losses.
  • This has helped the housing market by backing the mortgages of borrowers with down payments as little as 3.5 percent.
  • The FHA has given out one-third of total loans used to purchase homes last year.
  • However, the FHA insured around 739,000 loans that were delinquent, an increase of more than 100,000 a year ago.

These losses represent about 9.6 percent of its $1.08 trillion in guaranteed mortgages. Now, the FHA is projected to need more money to pay off its projected losses than it has in its reserves. Since the FHA has permanent and indefinite budget authority, there is speculation that it may automatically receive money from the U.S. Treasury.

However, the Obama administration is looking for ways to avert the need to receive funding from the Treasury. Some measures include raising mortgage insurance premiums and finalizing additional legal settlements with lenders in order to reduce the $700 million budget shortfall.

On the other end of the aisle, Republicans have argued in favor of reducing the maximum loan limits and raising minimum down payments. Similarly, limiting loans to borrowers below certain incomes would also help alleviate the situation.

Despite never relaxing its underwriting rules, the FHA suffered heavy losses during 2007 and 2008, when the housing market was at its worst.

Officials have resisted efforts to shut borrowers out of the market. The U.S. Department of Housing and Urban Development, for example, hasn't implemented a regulation that would limit borrowers debt levels by limiting the amount of cash sellers could contribute for borrowers closing costs.

Source: "FHA Nears Need for Taxpayer Funds," Wall Street Journal, November 14, 2012.

 

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