A sold sign is posted in front of a home for sale in Mariemont, Ohio. (Al Behrman / Associated…)
WASHINGTON -- The Obama administration's proposed budget projects the Federal Housing Administration will need a $943-million bailout this year to stabilize its shaky long-term finances.
The agency, whose mortgage insurance business increased dramatically during the Great Recession, is supposed to fund itself from premiums it charges homeowners. It has never received taxpayer funds in its 79-year history.
But the agency reported in November that reserves to cover losses on some of the more than $1 trillion in mortgages it insures had dropped into negative territory for the year that ended Sept. 30.
With FHA facing a shortfall of $16.3 billion to cover projected losses in coming years, Obama's 2014 budget anticipates the agency's reserve fund would need $943 million this year.
The FHA has permanent authority to draw the money from the Treasury and does not need congressional approval for the bailout. A final decision would not be made until the fiscal year ends Sept. 30.
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FHA has taken steps in recent years to boost its reserves, and FHA Commissioner Carol Galante said Wednesday she hoped the agency's finances would stabilize enough through the end of this fiscal year that it would not need the bailout.
"The President’s budget projects that FHA may need a $943-million credit from the U.S. Treasury in October to make certain sufficient reserves are on hand today to cover projected losses over the next 30 years," she said. "FHA is taking every appropriate action to reduce the likelihood that such assistance is needed."
Edward J. Pinto, a former Fannie Mae chief credit officer who has argued that lax FHA lending helped feed the foreclosure crisis in low-income neighborhoods, said the Obama budget drastically underestimates the potential for losses.
“My own estimates show the FHA is insolvent to the tune of $32 billion, based on generally accepted accounting principles,” said Pinto, a resident fellow at the American Enterprise Institute, a free-market think tank. “The billion dollars [in the Obama budget] is based on government accounting principles, which as someone once said are neither accounting nor principled.”
The $1.1 trillion in FHA insurance that’s currently in force on mortgages would pose an enormous risk should the economy stop growing, Pinto contended: “If the United States has just a modest to moderate recession at any time in the next three or four years, FHA and the taxpayers will suffer catastrophic losses.”
The FHA has played a crucial role in helping stabilize the housing market after the subprime crash. It insures loans with down payments of as low as 3.5%.
As banks pulled back on lending during the recession, FHA's role in the market expanded. Now its long-term finances are being dragged down by bad loans it backed from 2007 to 2009.
As of Sept. 30, the agency had $30.3 billion in cash reserves to cover $46.6 billion in projected losses.
The FHA's net worth is not supposed to drop below 2% of the outstanding balances of the loans it guarantees. But the agency's so-called reserve ratio ended 2012 at negative 1.44%.
"If the FHA were a private financial institution, likely somebody would be fired, somebody would be fined, or the institution would find itself in receivership," said House Financial Services Committee Chairman Jeb Hensarling (R-Texas). "Instead, the FHA is merrily on its way to becoming the recipient of the next great taxpayer bailout. It’s outrageous."
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