FHA Reserves: Is FHA Teetering on the Brink of Failure?

by Karen Lawson
November 16th, 2009

The Federal Housing Administration (FHA) insures 685 billion in home loans; the US Congress mandates that FHA maintain cash reserves equal to two percent of this amount. Current reserves held by FHA total about one-half percent, or $3.6 billion. Against the backdrop of government bailouts to Fannie Mae and Freddie Mac, this news is particularly grim for bail-out weary taxpayers. There may be good news on the horizon.

FHA Market Share Growth May Re-pad Dwindling Reserves

As sub-prime lenders fell by the wayside, homebuyers of modest means turned to FHA loans, which are currently the premier source of home financing for those who can’t pay 10 to 20 percent down plus closing costs for buying a home. Low mortgage rates are enabling more moderate income buyers to qualify for home loans, and these buyers are turning to FHA. The agency insured approximately $360 billion in mortgage loans during fiscal 2009, about five times more than it insured during fiscal 2005. The burgeoning numbers of new FHA home loans,and consequently, the increase in FHA mortgage insurance premiums collected from homeowners, should help rebuild depleted reserves. The question is, how can FHA meet its mission of providing accessibility to home ownership to those who cannot qualify for conventional mortgage loans without losing it all by making risky loans?

FHA Loan Requirements: Time to Reconsider?

The current problems facing the FHA stem from risky loans made under FHA loan requirements that provided home loans to large numbers of homeowners who defaulted on their loans. Whether these borrowers fell behind on payments because they couldn’t afford it at all, or defaulted due to harsh economic conditions is unknown. FHA loan requirements may be too lenient, but what happens to housing markets if FHA guidelines are rewritten to exclude large numbers of home buyers? On the other hand, the US government cannot continue to supply bailouts to dysfunctional private and public entities that can’t survive without billion$ in bailouts.

FHA: Balancing Homebuyer Needs with Responsible Lending

If FHA needs a bailout, it’s reasonable for Congress to attach mandates for review and revision of FHA loan requirements. The elephant in the room remains; with unemployment levels at 10.2 percent and expected to grow, many more FHA insured loans may fail as borrowers lose their jobs and/or exhaust their resources paying for homes they can neither afford nor sell in today’s depressed markets. FHA’s long term solvency could largely depend on the success of government sponsored modification and refinance programs designed to prevent foreclosure, but these programs won’t help those who cannot meet income requirements. Until the US job market improves, FHA will likely continue to absorb mortgage loan losses caused by foreclosure.

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