November 16, 2012
A report by an independent actuary shows that the Federal Housing Administration (FHA), the US government’s mortgage insurer, ended fiscal-year 2012 with a $16.3 billion insurance-fund deficit. Assets won’t cover projected losses on the $1.1 trillion portfolio of mortgages it backs due to mounting defaults on loans issued as the housing market collapsed. Several independent studies had predicted just such an outcome (link to Gyourko, 2011; Pinto 2011).
FHA currently backs 15 percent of U.S. mortgages issued for home purchases. The agency provides liquidity to the housing market by insuring lenders against losses on loans with down payments as low as 3.5 percent. Lenders are made whole if the mortgages default. More than 17 percent of all FHA loans were delinquent in September 2012 (FHA website). The agency has lost $70 billion on loans it insured from fiscal years 2007 through 2009. The report blames the fund’s losses largely on loans in which sellers were allowed to cover the down payment on behalf of the buyer, often by inflating the price of the house. Congress banned the FHA from backing such loans beginning in 2009.
In order to avoid a tax-payer bail-out it plans to raise premiums and sell delinquent loans, starting in January 2013. The FHA, which is part of the U.S. Department of Housing and Urban Development, hopes its new revenue-generating policies will be enough to offset the shortfall during the next fiscal year. The annual premium FHA charges borrowers in return for guaranteeing loans will rise by 10 basis points on new mortgages, a cost of about $13 per month for the average borrower. In addition, the agency will no longer allow some borrowers to stop paying premiums after 10 years. FHA will expand short sales and continue auctioning off at least 10,000 delinquent loans every quarter. It is unlikely that such measures will be sufficient to avert Treasury assistance, unless the housing market will improve drastically.
Link to the Report: Click Here