FHA Takes Steps to Avoid Taxpayer Bailout
Policy + Politics

FHA Takes Steps to Avoid Taxpayer Bailout

iStockphoto/The Fiscal Times

The Federal Housing Administration, facing a $16.3 billion deficit, will increase mortgage fees next year and take other steps in an effort to avoid a taxpayer bailout, the Obama administration said on Friday.

The agency, a primary source of funding for first-time home buyers and those with modest incomes, said it would raise the premiums it charges on loans it guarantees by 10 basis points, adding, on average, about $13 per month to a borrower's cost.

A basis point is one-hundredth of a percentage point.

Housing officials would not say whether the steps would be enough to keep the mortgage insurer from turning to the Treasury Department for a cash infusion for the first time in its 78-year history. "I'm not going to place bets," FHA Acting Commissioner Carol Galante told reporters.

The FHA's role in the mortgage market has expanded rapidly since the U.S. housing bubble burst. It now insures about 1.2 million mortgages, supporting about 15 percent of all U.S. home loans, up from 5 percent in 2006.

Combined with government-controlled Fannie Mae and Freddie Mac, which buy loans and repackage them as securities for investors, Washington's footprint in the market has grown to account for nearly nine of every 10 mortgages.

The three firms have helped prevent a deeper housing bust, but heavy losses have sparked debate over how to strike the best balance between protecting taxpayers and keeping credit flowing.

An independent audit delivered to Congress on Friday showed the FHA had depleted the capital it would need to cover expected losses on the $1.1 trillion in mortgages it backs. It said the losses would leave the agency $16.3 billion in the red.

"FHA is in dire need of restructuring," said Cliff Rossi of the University of Maryland's business school, who has worked at Fannie Mae, Freddie Mac and Citigroup. "The latest report highlights the broader issue surrounding housing finance and how much of a guarantee the government should provide and to whom."


The FHA's troubles stem from rising defaults on mortgages it guaranteed from 2007-2009 as the housing bubble was deflating. The audit projected those losses would amount to $70 billion.

Galante emphasized that the White House's annual budget proposal in February would be instrumental in determining whether the agency would need taxpayer funds by the time its fiscal year expires on September 30. Any final determination would not be made until September.

While officials stressed that a bailout is not a foregone conclusion, critics of the agency -- including some lawmakers -- are concerned it could turn out to be a burden on taxpayers along the lines of mortgage finance companies Fannie Mae and Freddie Mac, which have been propped up by more than $135 billion in funds from the U.S. Treasury.

Senate Banking Committee Chairman Tim Johnson said he was "deeply concerned" by the state of the FHA's finances and urged officials to "do everything in their power to protect taxpayers and restore its capital reserve" to the level required by law.

The FHA is mandated to maintain a 2 percent capital ratio, which is a gauge of its ability to withstand losses, but it has not met that target for four years. The audit found the ratio had dropped to negative 1.44 percent.

The loan insurer said it would use new loss mitigation tools both to shore up its cash and to help more borrowers avoid foreclosure.

It also said it will increase the use of short-sales on the loans it guarantees and offer investors pools of defaulted mortgages, committing to sell at least 10,000 distressed loans per quarter over the next year.

In addition, officials said the loan insurer would seek new authority from Congress to give it more flexibility in managing its loan programs to minimize losses.

The agency said the new steps, coupled with an expected $11 billion in new business by the end of 2013, will reduce the likelihood it will need taxpayer aid.

Earlier this year, the FHA only managed to avoid a bailout because it received an almost $1 billion payment from a U.S. settlement with mortgage servicers on claims of lending abuses.

"The administration will do its best not to have FHA make a Treasury draw," said Rossi. "Some sort of sleight of hand, they will get creative as they want to be, and likely avoid getting in a payment from Treasury."

Officials said the FHA's capital ratio should move back into positive territory in 2014, but that it would not reach its mandated 2 percent target until 2017.

"At a time when the private market constricted, the FHA stepped up, providing crucial liquidity and access to the mortgage market," said Representative Maxine Waters, a senior Democrat on the House Financial Services Committee.

She warned against taking any actions that would "precipitously" choke off loan availability.