Should FHA Reserves Be Raised?

by Peter G. Miller
October 7th, 2009

There’s a lot of concern regarding FHA reserves and with good reason — you sure would like them to be larger.

The Wall Street Journal, in it’s latest anti-FHA blast, notes that “the agency acknowledged this month that a new but still undisclosed HUD audit has found that FHA’s cash reserve fund is rapidly depleting and may drop below its Congressionally mandated 2% of insurance liabilities by the end of the year.

“At a 50 to 1 leverage ratio, the FHA will soon have a smaller capital cushion than did investment bank Bear Stearns on the eve of its crash. Its loan delinquency rate (more than 30 days late in payments) is now above 14%, or from two to three times higher than on conventional mortgages. Its cash reserve ratio has fallen by more than two-thirds in three years.”

Of course, looking at loans that are at least 30 days late is absurd. The more important issue is not whether loans are late, it’s whether they are being foreclosed. As we pointed out earlier this week:

>>>FHA mortgages have LOWER foreclosure levels than prime loans. Who says so? The Mortgage Bankers of America. As the Association reported in August, 3.00 of all prime loans were in the process of foreclosure versus 15.05 percent for subprime loans and 2.98 percent for FHA mortgages.

It’s surprising that the Wall Street Journal is not also concerned about bank reserves. For instance, it reported last week that “earlier this past week, the FDIC proposed the banking industry prepay $45 billion in fees by the end of the year to replenish the deposit-insurance fund, which has fallen into the red for the first time since 1991.”

Now, just asking here and don’t mean to be picky, but if the FDIC insurance fund is in the red does that mean it has less money then, say, Bear Stearns?

Just how much of a reserve is $45 billion. Let’s see….

The FDIC reports that as of June 30th we had 6995 commercial banks. They had assets of $11.895 trillion.

In other words, if the banks broke down and actually paid $45 billion to the FDIC — something which has not happened yet and may not happen given bank opposition in Washington — the FDIC would have reserves equal to 0.00378310214 percent of bank assets.

That sure seems a like lot less than 2.0 percent.

There’s a real need for both the FDIC and the FHA to boost their reserves. But the glum reality is that major banks on Wall Street have absorbed much of the capital that could otherwise have gone to reserves, healthcare payments and people without executive bonuses. Had we not bailed out Wall Street there would be plenty of cash for other segments of the economy. And, of course, had we properly regulated Wall Street in the first place there would have been no need for bailouts.

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