The Federal Housing Administration (FHA) told Congress and reporters Thursday that its cash reserve fund has deteriorated to $3.6 billion – the lowest it’s been in the agency’s 75-year history.
The reserve fund holds excess cash brought in by the federal mortgage insurer beyond what it needs to cover anticipated loan losses. By law, FHA is required to keep the nest egg at a minimum of 2 percent of all the mortgages it insures. The $3.6 billion balance represents only 0.53 percent of FHA’s mortgages.
The capital reserve assessment was part of the agency’s annual actuarial audit, conducted by the firm Integrated Financial Engineering (IFE) of Rockville, Maryland.
After a week-long delay in disclosing the results of the independent review, agency officials said today that IFE’s study shows FHA has sustained “significant losses” from loans made before 2009, leading to its under par cash cushion. According to the agency, about 32 percent of FHA loans were in default in 2007 and 24 percent in 2008. The agency’s 2009 delinquency rate, though, is only 6.46 percent.
“The story of FHA’s financial status at the end of FY 2009 is then the tale of two portfolios,” HUD Secretary Shaun Donovan said in the annual report submitted to Congress. “The older portfolio has high rates of delinquencies and is expected to have high rates of insurance claims in the future. The new portfolio, which soon will be larger than the older portfolio, is expected to have more modest claim rates over the life of the loan guarantees.”
The FHA’s financing fund, separate from its cash reserve fund, is used to pay claims on existing loans that default, and is well-stocked. The two funds combined total $31 billion, or more than 4.5 percent of the agency’s outstanding insured mortgages, FHA said in a statement.
John A. Courson, president and CEO of the Mortgage Bankers Association (MBA), called Thursday’s announcement “a major wakeup call for FHA and the lending community, but no reason to panic.”
“The two percent reserve requirement was established in order to ensure that FHA could stand the stress of a major housing and mortgage market event. It is safe to say that FHA is facing that type of event today,” Courson said.
FHA’s financial outlook has taken the spotlight because of its amplified role in the housing market and its growing portfolio. In the 2009 fiscal year, which for FHA is the end of October, the agency guaranteed more than $360 billion in single-family mortgages. That represents a 75 percent increase over FY 2008 activity, and more than four times the volume of insurance commitments made in FY 2007.
It’s this exponential growth, coupled with declines in property prices and an industry-wide rise in delinquencies fueled by unemployment, that has some economists and sideline observers worried that FHA will need its own taxpayer bailout.
But according to the Center for American Progress (CAP), which recently conducted its own analysis of risk in the FHA portfolio, these worries are ill-placed. CAP says its study shows that FHA’s recent book of business is likely to be protected from severe losses, even if default rates remain high. The organization explains that this is largely because FHA has expanded its activities in markets that have already fallen, thus minimizing exposure to losses from substantial future price declines.
Sarah Rosen Wartell, CAP’s EVP and a former FHA official, said, “Today’s housing market is the 100-year flood. Congress established the capital reserve fund in 1990 to protect against unforecasted claims, but few imagined house price declines like those we have experienced already. And despite the fact that spillover from toxic conditions in the subprime market and poor policy choices in prior years left FHA with even more significant losses than the down economy would produce, it appears more likely than not that FHA will withstand those conditions without calling upon taxpayer resources.
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