What Happened To FHA Reserves?

by Peter G. Miller
April 27th, 2009

In the world of federal rules and regulations the accounting year begins October 1st. This means that for the FHA half the year ended March 31st, a good marker to see program results to date.


As of the end of March, the FHA had:

___ 1,405,620 mortgage applications — that’s 84.4 percent higher than the 762,266 loan applications made during the first six months of fiscal 2008.

___ 867,716 approved loans — that’s more than double the 2008 total of 406,833 to this point, an increase of 113.3 percent.

___ 85,548 reverse mortgage applications — a figure up 16.1 percent from 2008 for what HUD calls home equity conversion mortgages, HECMs

___ 57,856 reverse mortgage approvals. That’s up just 4.8 percent over last year.


There’s little surprise with the idea that FHA mortgage numbers are growing. Indeed, FHA marketshare has risen from 3 percent in 2006 to 35 percent in the fourth quarter of 2008.

The FHA loan program is now the de facto loan option for first-time buyers, entry-level purchasers and those looking to refinance on sane and safe terms.

Unfortunately, the growth of the FHA program has also raised concerns regarding its viability. There are worries, for example, regarding high default rates. The Wall Street Journal, reports that the “estimated the economic value of the FHA’s insurance fund was $12.9 billion as of Sept. 30,” a figure that was down 39% from last year.

The FHA Reserve Fund

Now you might think, well gee, those FHA borrowers are screwing up big time, however there are two points to be made: First, in an environment with rising unemployment levels you will also get rising foreclosure rates and thus claims against the reserve fund. Second, the major reason that the FHA reserves are lower than they should be is that the Bush Administration removed billions of borrower dollars from the system.

Program reserves are funded with insurance premiums paid by FHA borrowers. Going back to the 1930s and until December 8, 2004, the FHA program was a mutual insurance program — that means FHA borrowers generally got a refund when their loan was paid off, a refund which came from unneeded reserve funds.

Just because the refund program was stopped in 2004 did not mean that the program no longer had excess reserves. Instead, the Bush Administration simply gave FHA premium money to the Treasury to offset huge budget shortfalls.

$13.5 Billion Given Away

How much FHA profit was given away? About $13.5 billion in recent years, not counting fiscal 2008. What about the interest that might have been earned on $13.5 billion? Nope, no interest for the FHA reserve fund from the money given to Treasury.

The next time you hear someone moo and holler about the FHA reserve fund, ask if they know where the money actually went. The fund may be smaller because of rising default rates, but that’s not the only reason.

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