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FHA chief says the mortgage insurer won't need a bailout despite dwindling reserves

The Federal Housing Agency announces a series of policy changes to reduce its risk of future losses and strengthen its reserve fund.

September 19, 2009|Jim Puzzanghera

WASHINGTON — A federal agency that's supposed to help the housing market recover from the financial crisis is taking steps to avoid becoming a victim itself.

The Federal Housing Administration, which insures mortgages, announced Friday that its reserves are set to fall below the legally mandated level. The agency is fully funded through fees paid by homeowners who have FHA-backed loans, and that money is endangered by the continued tide of foreclosures.

But FHA Commissioner David H. Stevens said there was no need for the government to pump money into the agency for the first time. Instead, he announced a series of policy changes to reduce its risk of future losses that will be enough to strengthen the reserve fund.

"There will be no taxpayer bailout," Stevens said. He emphasized that the fund in question is a secondary reserve and is projected to return to its required level in two years without any changes by the FHA.

But with the FHA insuring more and more mortgages as banks have tightened their lending requirements, it might be only a matter of time before the struggling housing market and rough economic conditions cause the agency's losses to outstrip its reserves, said Bert Ely, an independent banking consultant.

"They're putting a lot of mortgages on their books," Ely said, many of them taken out by weak borrowers at a time when unemployment is still high. "None of this bodes very well for the FHA down the road."

Sen. Christopher S. Bond (R-Mo.) described the FHA as "a powder keg that will explode," potentially at taxpayer expense. He called for more sweeping changes, including greater management oversight and tougher efforts to prevent fraud. "It's critical we address FHA's problems now because the taxpayer credit card is maxed out and a viable FHA is necessary for our economic and housing recovery," he said.

The FHA, the world's largest mortgage insurer, was created during the Great Depression to help average people buy homes. It insures mortgages made with a down payment of as low as 3.5%. Its business fell off during the housing boom as lenders offered subprime and other risky mortgages to buyers. But after the market collapsed, the FHA has taken on a greater role. The agency now insures 23% of the mortgage market, compared with about 2% in 2006.

"They're absolutely critical," said Josh Denney, associate vice president for public policy at the Mortgage Bankers Assn. "They're the tool for many first-time homeowners or anyone else who doesn't have a 20% down payment right now."

Stevens was more blunt.

"Without FHA, there would be no housing recovery," he said, noting that 80% of its business now is new-home buyers.

But that increased volume has exposed the FHA to greater risk. The percentage of FHA-backed loans at least 90 days overdue or in foreclosure was 7.78% for the second quarter, up from 5.43% a year earlier, the Mortgage Bankers Assn. said.

The FHA's annual independent actuarial study projects that its secondary reserve fund will fall below the congressionally mandated level of 2% of the value of the mortgages on its books to cover projected losses over the next 30 years, Stevens said. The fund was at 6.4% on Sept. 30, 2007.

The fund will still be above zero, although an exact number was not released because figures are still being calculated before the report is submitted to Congress in November, he said. And counting the primary reserve fund, the agency has about $30 billion in total reserves, or more than 4.4% of the value of the loans it is insuring.

The actuarial study projects the secondary fund to rise back to its mandated level within two years as the housing market recovers, Stevens said.

But the FHA is required by law to take steps to raise the reserve, and projecting the future of the volatile housing market can be difficult. In fact, the secondary reserve has been drained because the market is not bottoming out this year as predicted. The study projects that the market will continue to decline into the first three months of 2010, Stevens said.

The FHA does not plan to raise mortgage insurance premiums, he said. Instead, it is trying to reduce its risk of future losses. The agency proposed new rules that include requiring lenders to have at least $1 million in cash and other assets, up from $250,000, to limit losses passed on to the FHA. It will cap refinancings at 125% of the current home value and stop certifying mortgage brokers to issue FHA-backed loans. The agency also will appoint its first chief risk officer.

Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said he was satisfied with the steps. "I don't think this is any crisis," he said.

The Mortgage Bankers Assn. supports most of the changes but is concerned about the higher net worth standard for lenders, Denney said. The association has called for an increase to $500,000.

Ely said he was worried about increased fraud as FHA's loan portfolio expands. HUD Inspector General Kenneth M. Donohue told Congress in June that past periods of high volume at FHA, show "that the program was vulnerable to exploitation by fraud schemes."

Stevens said some of the actions taken Friday were aimed at reducing fraud.


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