FHA Cash Reserves Fall Below Required Levels: What’s Next?

by Karen Lawson
November 13th, 2009

The Wall Street Journal reports that cash reserves have fallen well below the 2 percent level mandated by Congress. This news fuels speculation that FHA may need a tax payer funded bailout, a situation that could could provoke public disapproval of FHA home loan programs.

FHA Loans Provide Funding for Moderate Income Buyers

The loss of FHA home loans could spell disaster for moderate income homebuyers who cannot qualify for home loans under stringent conventional mortgage lending requirements. Buyers with steady jobs, documented income, and acceptable credit are often roadblocked by required down payments of 10 to 20 percent of home value. Although home values have fallen sharply in some areas, finding several thousand dollars for a down payment and closing cost can be the line between buying a home and remaining renters.

Low Interest Rates, Lower Home Prices, and FHA Loans: Combination for Opportunity

Moderate income home shoppers continue to enjoy the combined positive effects of low interest rates, lower home prices (although there are signs of change), and flexible FHA guidelines for loan approval. In years past, mid six figure home prices, higher rates, and a variety of sub prime loan products led many homebuyers straight into the nightmare of foreclosure.

Extension of Tax Credit and FHA Home Loans: More Benefits for Buyers

In a move intended to bolster the US housing market, Congress extended the federal tax credit for first time homebuyers, and also expanded eligibility to some current and former homeowners. Buyers who are prepared to qualify for FHA loans may gain the benefits the unprecedented intersection of favorable home prices, interest rates, comparatively lenient FHA guidelines, and a tax credit of up to $8000 for first time buyers or $6500 for eligible current and former homeowners.

Congressional Balancing Act: Reconciling FHA Financial Worries with Housing Market Needs

If Congress acts to limit FHA home loans, housing markets would likely suffer another set back. FHA loans now account for about 25 percent of the market share. If borrowers eligible for FHA loans, but not able to qualify for conventional mortgage loans are denied financing, the pool of qualified buyers will shrink. A detailed analysis of foreclosed FHA loans may yield sufficient information to revise FHA home loan programs to better protect reserves and reduce the need for a public bailout for the FHA.

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