FHA nears bankruptcy with 9.6 percent bad loans, to ask for first bailout in history

The United States Department of Housing and Urban Development (HUD) released a report to congress regarding its Federal Housing Administration (FHA).  The study found that its single-family mortgage and reverse mortgage insurance programs are likely to experience a $16.3 billion budget deficit.

For the first time in its 78-year history, started under President Franklin Delano Roosevelt during the Great Depression, is expected to receive a taxpayer-funded bailout sometime early next year as its total losses will reach $46.7 billion.  The FHA is supposed to hold reserves equal to two percent of its portfolio, but the study found that its reserves are equivalent to negative 1.33 percent.

In order to raise cash, the FHA is expected to generate $11 billion from new business, it will raise premiums by 0.1 percent – borrowers will see an additional $13 on their monthly payments – and sell 10,000 delinquent loans each quarter under its Distressed Asset Stabilization Program before making an appeal to the Treasury Department for bailout money.

“While the loans made during this Administration remain the strongest in the agency’s history, we take the findings of the independent actuary very seriously,” said FHA acting-commissioner Carol Galante in a statement.  “We will continue to take aggressive steps to protect FHA’s financial health while ensuring that FHA continues to perform its historic role of providing access to homeownership for underserved communities and supporting the housing market during tough economic times.”

Most of its losses occurred between 2007 and 2009 when the administrations of Presidents George W. Bush and Barack Obama turned to the federal agency for help and its portfolio soared to $1.1 trillion.  However, since 2010, the loans have been projected to be “profitable.”

Although officially it has insured close to 16 percent of home purchases last year, the Wall Street Journal has noted that the FHA is backing 90 percent of new mortgages this year, considering all of its programs and initiatives: Fannie Mae, Freddie Mac, Ginnie Mae, mortgage interest deduction and home buyer tax credits.

Democratic South Dakota Senator and Chairman of the Senate Banking Committee Tim Johnson has stated that he is deeply troubled by the report.  He added that he will urge Washington officials to “protect taxpayers” and make sure the FHA “[restores] its capital reserve.”

Meanwhile, Tennessee Republican Senator Bob Corker issued a statement regarding the FHA.

“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,” said Sen. Corker.  “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.”

However, Democratic California Congresswoman Maxine Waters defended the FHA in an interview with Reuters when she said the housing agency “stepped up” at a time when the “private market restricted.”  Waters also warned of restricting loan availability.

Gary North of the Tea Party Economist opined that this incident would not have happened to a private lending agency.

“No private lending agency would tolerate delinquencies this high,” wrote North.  “But that’s what government is for: to run losing businesses at taxpayers’ expense. It’s just doing its job.  Is this Ponzi economics? You bet it is.”

The FHA nearly received a bailout earlier this year, but it avoided one when it settled a $1 billion payment with mortgage servicers on allegations of lending maltreatment.

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