There’s been considerable interest in the media in FHA’s financial position. The agency recently announced several increases to the premiums it charges borrowers to have their mortgage guaranteed by the agency. Those increases, along with some reports that FHA might request federal funds to shore up its reserves, make it seem like the agency is navigating a rocky period.
It is, but the agency is acting prudently and won’t need an influx of
taxpayer funds this fiscal year, so its 78-year record of never having
to request funds remains intact. Nor is there reason to believe right
now they’ll need to ask for funds in fiscal 2013 or beyond, analysts
say.
On the premium increases, the 0.10 percent hike that takes effect
April 1 is mandated by law as part of the bill Congress passed at the
end of 2011 to extend the payroll
tax vacation. That bill required an increase in the guarantee fee that
Fannie Mae and Freddie Mac charge banks for guaranteeing loans. Congress
included the FHA increase in the bill, too, at least in part to create
parity with Fannie and Freddie, NAR analysts say.
Another FHA premium increase, of 0.25 percent, is limited to jumbo
loans, and another increase, of 0.75 percent, is specifically for
helping the agency’s reserves
.
.
With these increases and with funds the agency will receive from the
“robo-signing” settlement with large banks the federal government
announced a few weeks ago, the agency has enough funds to replenish its
reserves for fiscal year 2012, NAR analysts say.
Does this mean FHA will be in trouble again next fiscal year, which
starts in October? NAR analysts say it’s too soon to tell. The recent
drain on the agency’s reserves stems in large measure from the loans
originated shortly after the housing downturn, when the availability of
mortgage financing
was at its worst and borrowers flocked to the agency. It’s now working
through those loans. But looking ahead, things probably won’t be so bad,
in part because the loans it backed from mid-2009 to now are among its
strongest ever, so defaults could drop accordingly.
In any case, the pressures on the agency’s reserves aren’t just from
defaults; they’re from continuing weakness in home prices. As long as
prices stay weak, the agency has to hold more money in its reserves. So,
the pressure on reserves isn’t solely because of losses but because of
high reserve requirements in the face of struggling prices.
More fundamentally, it’s easy to lose sight of just how much in
reserves the agency has. Unlike banks, which hold one year of reserves
for the loans they carry, FHA has to hold 30 years’ worth. So, when the
agency says its reserves are dipping, that dipping is happening in the
context of reserves equivalent to 30 years for each of the mortgages it
covers. That means its reserves amount to something like almost $38
billion. That’s money it still has.
On top of that, FHA maintains a second reserve account of 2 percent of its 30-year reserve amount. It’s this 2-percent reserve that’s been dipping.
So, to put this all in perspective, the agency continues to have tens
of billions of dollars, but while it’s working through the loans it
supported right after the mortgage crisis, it’s feeling pressure on its
2-percent reserve account, and part of that pressure comes not from
losses but higher reserve requirements while prices stay dormant.
Once the agency works through this tough period, NAR would like to see it revisit its fee increases and lower them as appropriate.
On March 2, 2012, in Breaking News, Mortgage Financing, Politics & Government, by Robert Freedman
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