Realty Views By Terry Ross
May 21st, 2013 – Just when it appeared that the Federal government was getting out of the home mortgage bailout business, it looks like it may be pulled back in.
With most of the major lenders now in a position to pay back the massive government bailouts of 2008 and 2009 and have enough money to keep operating, it appears that the Federal Housing Administration (FHA), which has taken a more prominent position over the past five years providing insurance for high loan-to-value mortgages, could need a massive infusion of federal monies to keep it solvent.
The FHA may need to draw $943 million from the Treasury Department this fiscal year to cover losses from loans the agency insured as the housing market was collapsing in 2007, according to President Barack Obama’s fiscal 2014 budget, released in April. The White House estimated the FHA has about $30 billion on hand, but said souring loans would likely swamp its cash reserves.
Many of the traditional lenders either tightened their standards or eliminated programs at the beginning of the Great Recession six years ago, leaving the FHA as the go-to lender for many borrowers who otherwise would not have been able to acquire home loans. The agency offers insurance to lenders for loans with as little as 3.5 percent down and will insure borrowers with less than perfect credit. The FHA is a major source of funding for first-time homebuyers and people with modest incomes. It currently backs $1.1 trillion in home loans.
If the bailout were required, it would be the first for the government's mortgage insurer in its nearly 80-year history. The FHA was established in the 1930s during the Great Depression to get the housing market back on its feet. Now, it could need a huge infusion from taxpayers to keep it afloat. FHA Commissioner Carol Galante said the agency still might be able to avoid taking aid from the U.S. Treasury, despite the financial hole projected in the president’s new budget. The agency has until the fall to decide whether it needs a cash infusion.
“FHA, while still under stress from legacy loans, has made significant progress and is on a sound fiscal path forward,” Galante added.
In November, an independent audit found that the FHA faced a projected deficit of $16.3 billion. Since then, the agency has a taken a number of steps to shore up its finances, including raising the premiums borrowers pay and eliminating the option to cancel the FHA insurance when a home’s equity position reached more than 20 percent. Galante said the policy changes could bring in about $18 billion this year.
Last year, the White House said the FHA would need about $700 million from the Treasury to remain solvent, but legal settlements with the nation’s largest banks allowed the agency to avoid an infusion of taxpayer aid. The FHA is required by Congress to keep enough cash on hand to cover all expected future losses and must take a taxpayer subsidy if its projected revenue falls short.
If the FHA does end up needing a bailout of taxpayer funds this year, the amount of aid “could be a little higher, it could be a little lower” than the almost $1 billion from taxpayers the White House has projected, Galante said.
The facts of the situation have not quelled the political infighting over this issue in the least. Democrats want to preserve the program to keep home loans affordable, while Republicans have attacked the agency and blamed mismanagement.
House Financial Services Committee Chairman Jeb Hensarling (R-Texas) contends that the government’s role in the housing market should be dramatically reduced, although he offered no details about how to accomplish this goal.
“If the FHA were a private financial institution, likely somebody would be fired, somebody would be fined or the institution would find itself in receivership. Instead, the FHA is merrily on its way to becoming the recipient of the next great taxpayer bailout,” he said. “It’s outrageous. Since 2009, administration officials have repeatedly assured Congress and the American people that FHA was healthy and on a sustainable financial footing. The facts, however, as even the president’s own budget now confirms, prove otherwise.”
Critics of the agency often argue the FHA needs to require more stringent borrowing standards for the loans it insures and should shrink its market share. They say structural changes are necessary even if the FHA avoids drawing from the Treasury. Losses on so-called reverse mortgages were given as one of the main reasons the FHA might need a bailout.
Reverse mortgages can serve as financial lifelines by helping seniors access their equity without selling their homes. But the reverse loan market has faced growing problems resulting from sinking home values over the past few years.
“The FHA still doesn't have enough capital to squeeze by but they keep saying not to worry,” said Edward Pinto, a resident fellow at the American Enterprise Institute who is a frequent critic of the FHA. “They have a huge book of risky loans and remain incredibly vulnerable, which in turn makes the taxpayer incredibly vulnerable to even a moderate economic slowdown.”
If program changes and settlements in pending lawsuits with major banks improve the financial standing of the FHA, the bailout might not be necessary, and there are efforts afoot in Congress to work on legislation to bolster the agency’s financial position. A decision on a bailout isn’t needed until September 30, so you can bet there will be efforts on all sides to avoid such an embarrassment.
(Terry Ross, the broker-owner of TR Properties, will answer any questions about today’s real estate market. E-mail questions to Realty Views at firstname.lastname@example.org or call 562/498-1049.)