A new report from a finance professor predicting the coming insolvency of the Federal Housing Administration has some government officials and analysts spooked, according to a new report from The Wall Street Journal.
Since the market collapse in 2008, the FHA has had an increasingly important role in the mortgage origination business. Though it is not necessarily a lender, (like Fannie Mae and Freddie Mac, it guarantees mortgages) FHA loans have become the one dependable source of financing for new and low-income homebuyers, and it currently backs a third of new mortgages, up from just 5 percent in 2006.
Kenneth Rosen, chairman of the Fisher Center for Real Estate Research at the University of California at Berkeley, said the FHA’s importance on the post-boom housing market cannot be overstated.
“Without the FHA, the housing market would not be in a recession; it would be in a depression,” Rosen said .
Yet, even the FHA, with its careful lending standards and meticulous regulations, is facing billions in potential losses that could lead to a taxpayer bailout of the organization.
The report that has spurred such fears, by Joseph Gyourko of the University of Pennsylvania’s Wharton School, estimated that the FHA could face around $50 billion in losses in the coming years, and that only, as The Wall Street Journal quotes, a “quick and substantial economic and housing market recovery” can avoid “substantial losses for American taxpayers.”
Those losses would be the result of loans made in 2007 and 2008, when the financial crisis was at its peak. Since then, unemployment and delinquencies have spiked, as have banks’ losses on home loans from that time period. Currently, the FHA guarantees 7.2 million mortgages worth $1 trillion, and it has committed some $29 billion in reserve funds to cover future losses.
The Journal article notes two important details of the FHA’s financing. One, the organization does have the right to “indefinite budget authority,” which would allow it to draw funds from the Treasury without congressional approval; and two, that the FHA has not been idle in the face of future financial hardships.
The FHA earns money from the mortgage insurance it charges on its loans (which compensate for the low down payments its loans require), and within the past year, the FHA has twice raised its insurance premiums, while increasing down payments to 10 percent for borrowers with credit scores of 580 or less.
FHA officials have taken steps to shore up the agency’s finances, including twice raising the insurance premiums that borrowers must pay in the past year. Last year, the agency raised down payment requirements to 10% for borrowers with credit scores below 580.
But unfortunately, it doesn’t seem to have been enough. Paul Miller, an analyst with FBR Capital Markets, was quoted by The Journal predicting hardships for the FHA.
“Unless home prices rebound, I don’t understand how they’re able to avoid a restructuring and a Treasury infusion,” Miller said.