When the FHA Goes Bust – It Can Only Be Trouble for Agents

The Wall Street Journal published a telling story today on the FHA. Are you following this critical housing market story? What could this news mean for agents?

The Federal Housing Administration is expected to report later this week that it could exhaust its reserves because of rising mortgage delinquencies, according to people familiar with the matter. That could result in the agency needing to draw on taxpayer funding for the first time in its 78-year history.

The FHA’s tenuous financial condition would put a spotlight on an often-overlooked housing-market rescue. The New Deal-era agency, which doesn’t actually make loans but instead insures lenders against losses, has played a critical role stabilizing the housing market by backing mortgages of borrowers who make down payments of as little as 3.5%—loans that most private lenders won’t originate without a government guarantee. The FHA accounted for one third of loans used to purchase homes last year among owner occupants.

Already, the Obama administration has taken a series of steps to stabilize the housing sector since the 2008 financial crisis, including $137 billion spent to bail out Fannie Mae and Freddie Mac. Together with those two companies, federal agencies are backing nearly nine in 10 new mortgages.

The FHA guarantees fewer mortgages than either Fannie or Freddie, but it now has more seriously delinquent loans than either of the mortgage-finance giants. Overall, the FHA insured nearly 739,000 loans that were 90 days or more past due or in foreclosure at the end of September, an increase of more than 100,000 loans from one year ago. That represents around 9.6% of its $1.08 trillion in mortgages guarantees.

The FHA’s annual audit estimates how much money the agency would need to pay off all claims on projected losses, against how much it has in reserves. Last year, that buffer stood at $1.2 billion, representing around 0.12% of its loan guarantees. Federal law requires the agency to stay above a 2% level, which it breached three years ago.

The decision over whether the FHA will need money from Treasury won’t be made until next February, when the White House typically releases its annual budget. Because the FHA has what is known as “permanent and indefinite” budget authority, it wouldn’t need to ask Congress for funds; it would automatically receive money from the U.S. Treasury.

A spokesman for the Department of Housing and Urban Development, which oversees the FHA, declined to comment.

You can find the entire story here.