FHA Looking Like a Bailout Candidate

This week’s report issued by the FHA, Federal Housing Administration, is signaling problems that could mean a taxpayer bailout in the next few years. A spike in serious delinquencies is creating concern. The report states that the number of loans three months or more behind in payments reached 9.3%, up from 8.4% in the previous period.

Joseph Gyourko, a real estate professor at the University of Pennsylvania’s Wharton School states that it’s very likely that the FHA will need a taxpayer bailout sometime in the next three to five years. A November audit of the FHA’s finances found that losses from mortgage defaults had depleted the agency’s reserve fund to 0.24%, or $2.6 billion during fiscal 2011. This is well below the congressionally mandated 2% level. This number is derived by measuring the net worth of the reserve fund compared with the value of FHA’s insured loans.

The continued falling of home prices is expected to drag the reserve fund down even more in the near future. One option to either reverse the process or stretch out the need to look at a bailout would be to further increase the fees charged to FHA borrowers. Estimates differ with analysts, but the expectations are that the size of a bailout would be between $20 billion and $50 billion.

Recent Congressional testimony by Shaun Donovan, the Secretary of HUD, shows that he stated that most of the problems with FHA loans were in mortgages issued prior to 2009. He stated that loans after that are performing much better, and that these healthier loans would be able to return the reserve fund to the 2% level sometime in 2014.

Others do not agree with that statement, saying that many loans taken out in 2009 and 2010 are destined for default. One reason given is that many of the borrowers in that time period purchased to take advantage of the First Time Homebuyer Tax Credit. Many of these home buyers didn’t even have the required 3.5% down payment without the tax credit. They are considered at high risk of default on their payments in the future.

If home prices do not stabilize and start to rise again, this contributes to the problem. The low FHA down payment these buyers made means that most of them are underwater, which presents a greater risk of default as well.