Oh no they didn’t!
Even after taking sweeping steps to shore up its finances and avoid a Treasury bailout, the Federal Housing Administration (FHA) still suffered an awkward blow last week, with the Government Accountability Office (GAO) labeling the troubled agency as a “high-risk” entity.
The reasons for the labeling, the GAO explained, were both systemic and financial, relating to the FHA’s finances and the state of the mortgage industry in the U.S.
Is the FHA ‘High Risk’?
Some of the details that went into the GAO’s decision included:
- The FHA is required, by law, to maintain capital reserves that are at least 2 percent of its portfolio; however, the FHA’s expansion – coupled with some tough losses – have dropped the agency’s reserves beneath that level.
- In fact, the FHA’s reserves are currently in the red, with the Mutual Mortgage Insurance Fund maintaining a -1.44 percent, or, a value of negative $16.3 billion.
- And the FHA’s portfolio has swelled in recent years, growing from $300 billion in 2007 to $1.1 trillion in 2012; according to HUD, the FHA’s market share in that time has gone from 3.77 percent of all home loans to 15.41 percent in July 2012 (the latest data available); and that’s down from 19.13 percent in 2010.
- The FHA’s increased role, GAO continued, is also poses a problem for private mortgage lenders as they tepidly reenter the housing market.
How Did it Come to This?
Carol Galante, the FHA’s commissioner, insisted recently in testimony before the House Financial Services Committee that the FHA’s latest changes will be enough to right the agency, even going so far as to say that no Treasury funds would be needed for the agency through 2013.
As the FHA braces itself, though, one question persists – how did it come to this? After all, the FHA has never played a more pivotal role in housing finance, and the agency did not compromise its lending standards during the housing boom like so many other lenders; so how did it get into its current predicament?
As the Wall Street Journal‘s Nick Timiraos recently wrote, the problem has largely arisen from a series of post-boom “DAP” (downpayment assistance program) loans, which involved struggling homeowners donating down payments to the buyer via third party charities; though the system was rife with abuse, and both the FHA and IRS attempted to abolish it, Congress kept the program in place until 2008, and the FHA was required to insure those loans.