FHA Pool Dips As Money Goes To Treasury

by Peter G. Miller
December 15th, 2008

The Washington Post reports that “the Federal Housing Administration’s fund to cover losses on the mortgages it insures is shrinking, but remains above the point where taxpayers would need to kick in money to cover defaults, according to an independent audit of the agency’s financial soundness.”

“As of Sept. 30,” says the paper, “that fund had an estimated $12.9 billion, a 39 percent drop from $21.2 billion a year ago, according to the audit by Integrated Financial Engineering of Rockville.” (For the full story, see: FHA Insurance Fund Has Fallen 39 Percent,” December 3, 2008)

Okay, there’s less money in the fund. Anyone care to ask why?

Certainly there are more FHA loans today than in the recent past, but so what. That would not reduce the FHA insurance pool because each loan comes with an up-front and monthly insurance premium.

Well then, you might think that the pool has declined because the number of FHA foreclosures has soared.

Nope. That’s not it.

According to the Mortgage Bankers Association’s latest foreclosure report, “the non-seasonally adjusted foreclosure starts rate remained unchanged for prime loans at 0.61 percent and decreased three basis points for subprime loans to 4.23 percent. The rate was unchanged for FHA loans at 0.95 percent and increased two basis points for VA loans to 0.59 percent.”

The reason the FHA insurance fund has so few dollars is very simple: During the past seven years the FHA has turned over insurance premiums worth $13.5 billion to the Treasury. Take that money, add in an estimated $2.5 billion in lost interest over the period, and you have a significant reduction in the size of the fund — a total of roughly $16 billion in a seven-year period.

If the FHA fund is down it’s not because of pay-outs to borrowers. The FHA stopped giving premium refunds for loans originated after December 8, 2004.

In other words, in the past few years the FHA program has been converted from a mutual insurance program to a for-profit venture with the Treasury getting the profits as the insurance pool has been drained. This is a convenient arrangement because it makes the federal deficit look smaller without actually raising taxes.

Plainly the money being paid by FHA borrowers is not being used for the intended and original purpose of the program, to cover FHA losses and to give the rest back to borrowers.

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