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