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FHA may need a bailout, lending conditions could tighten

As the FHA reserves are depleted with a growing number of mortgages delinquent or in foreclosure, a bailout could spell trouble for the recovery of the housing market.

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money bags

Bailing out the FHA

According to The Wall Street Journal1, 9.6 percent of all of the The Federal Housing Administration’s (FHA’s) $1.08 trillion mortgage guarantees or 90 days past due, or in foreclosure, depleting its reserves to a point that it appears a bailout may soon be requested. Last year, the difference between the FHA’s reserve amount, and the amount it would need if it had to pay all projected losses was only $1.2 billion, or .12 percent of its loan guarantees; the agency is required to keep the amount above 2.0 percent.

Given those numbers, the FHA may have no choice other than to ask the Treasury for money, and a bailout doesn’t bode well for a housing recovery.

So how did it come to this? Some speculate that the agency continued to insure bad loans from 2007 to 2009 while other insurers like Fannie Mae and Freddie Mac were reducing their risk, and The Journal adds that as recently as 2012, FHA was guaranteeing loans requiring only 3.5 percent down.

The FHA could have a negative net worth soon without a bailout, and while they have gotten an infinitely blank check from the Treasury and won’t have to beg for the funds from Congress, the relief would likely be short term, and risk upsetting politicians who will advise the agency adhere to stricter underwriting guidelines, which could make mortgages more difficult to obtain, as a tight lending environment could tighten up even more.

According to the National Association of Realtors’ Chief Economist, Dr. Lawrence Yun, the trade group anticipates a housing recovery unless the nation is pushed off of the “fiscal cliff” or there are “no further limitations on the availability of mortgage credit.”

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While the nation continues to see slight improvements in housing, this could be a substantial setback.

1 Wall Street Journal report

Tara Steele is the News Director at The American Genius, covering entrepreneur, real estate, technology news and everything in between. If you'd like to reach Tara with a question, comment, press release or hot news tip, simply click the link below.



  1. SteveAlbin

    November 16, 2012 at 4:58 am

    Federal Housing Administration has exhausted its reserves and may draw on taxpayer resources. “The recognition that FHA’s economic value is now negative is a stark reminder that we have put off fundamental housing finance reform for too long. FHA has strayed a long way from its original mission, and it’s time for us to return to fundamentals in housing, recognizing that having the federal government making loans to people who can’t pay them back isn’t good for homeowners, communities, or the country,”  NOT CORRECT

  2. Joe Loomer

    November 16, 2012 at 6:33 am

    “…to a point that it appears a bailout may soon be requested”  What’s the point of this post?  Are they requesting a bailout or not?  What indication is there that this is even being contemplated by the FHA?  And WTF, doesn’t the Journal even KNOW what an FHA loan is? : “The Journal adds that as recently as 2012, FHA was guaranteeing loans requiring only 3.5 percent down.”
    Navy Chief, Navy Pride

    • AGBeat

      November 16, 2012 at 10:30 am

      @Joe Loomer The Journal’s implication is that the quality of loans they back due to their underwriting standards are more lax than Fannie/Freddie, thus their reserves are depleted. They will not have a choice but to ask the Treasury for a bailout, and most suspect their underwriting standards will tighten.

  3. gregcook01

    November 16, 2012 at 1:04 pm

    Tara, FHA should adopt the model of VA loans. Over the past 17 quarters VA have been the best performing loans, while increasing their purchase market share by 71%.
    The VA difference? Family has to qualify based not just on ratios but on residual income. In other words, how much money will they have left after all the bill are paid? Including, Fed/state Taxes, social security. utilities and maintenance.
    Did I mention they’re doing it with ZERO DOWN?
    just my IMHO

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