FHA Disputes Whispers of Capital Reserve Problems

In the face of rumors that its capitalrnreserve ratio is nearing the danger point, the head of the Federal HousingrnAdministration (FHA) says that his agency does not need help from Congress. 

The WallrnStreet Journal reported this morning that the agency, part of the U.S.rnDepartment of Housing and Urban Development (HUD), might fall below the 2rnpercent capital reserve ratio demanded by Congress because of rising defaultsrnon mortgage loans it insured.  

Responding to the Journal article,rnFHA Commissioner David Stevens this morning said, “Even if that levelrnfalls below 2 percent, FHA continues to hold more than $30 billion in itsrnreserves today, or more than 5 percent of its insurance in force. Given thisrnreserve level, FHA will not need a congressional subsidy even if therncongressional capital reserve calculation falls below 2 percent.”

Mortgage loans insured by the government have soared to the highest levelsrnin two decades as borrowers have taken advantage of down payment requirementsrnfor FHA loans which are lower than those for other mortgages.

In thernpast two years, the number of loans insured by the FHA has soared and itsrnmarket share reached 23% in the second quarter, up from 2.7% in 2006.rnFHA-backed loans outstanding totaled $429 billion in fiscal 2008, a numberrnprojected to hit $627 billion this year.

At thernsame time, defaults in FHA insured loans are depleting its reserves.  According to the Journal, 7.8 percent of FHA loans were 90 days or more late or inrnforeclosure.  This is comparable to thernnational average, but because of the low down payment requirement, sometimes asrnlow as 3.5 percent, a borrower is less likely to hang on and try to save hisrnhome and FHA takes a bigger hit.

Should the reserve funds fall torndangerous levels, the FHA could either raise the premiums that borrowers payrnfor the agency guarantee or petition Congress for taxpayer funds to boostrnagency reserves

“FHA's full faith and credit insurance means that there is no risk tornhomeowners or bondholders independent of the congressional capital reservernrequirement,” Stevens said, adding that FHA continued to generate incomernfor taxpayers.

Departmentrnof Housing and Urban Development Secretary Shaun Donovan said in June,rn”there's a better than even chance that we will stay above the two percentrnreserve threshold. That suggests, not just for the 2010 business, but overallrnfor the portfolio, that we'll more than likely to stay out of a broader needrnfor any taxpayer funding.”

According to the Journal, the only thing the agency is obligated to do is notifyrnCongress if it falls below capital requirement. rnThis could, however lead to a demand that FHA reduce its lending whichrnis credited with helping to improve house sales.

The FHA's mandated 2 percent reservernmeans a minimum of $3 billion during the current fiscal year and $4 billionrnnext year.  The agency's assets havernincreased from $27 billion to around $31 billion in the past year.  A recent audit put the value of the fund atrn$12.9 billion last year or around 3 percent of all FHA backed loans.

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