Democratic and Republican lawmakers have been pushing for changes at the FHA since a November actuarial report said its reserve fund for bad loans may require a taxpayer subsidy of as much as $16.3 billion in fiscal-year 2013, the first time in its 79-year history that it wouldn’t be self-supporting.
The new assessment by White House budget staff may show some improvement because the turnaround in the housing market will shrink the losses FHA suffers on defaulted loans. The agency also has raised fees and tightened standards for new loans. Still, those factors probably won’t fully offset the damage caused by mortgages the agency backed during the years of the real-estate crash.
“My expectation is that there will be mixed perspectives coming out of the president’s budget,” Mortgage Bankers Association President and Chief Executive Officer David Stevens, who was FHA commissioner during Obama’s first term, said in a telephone interview. “It will likely show extremely healthy returns in terms of mortgages in the 2013 book. Nevertheless, I would not be surprised if it leaned in the same kinds of direction as the independent actuarial report.”
The FHA’s shortfall stems from loans it backed from 2007 to 2009 as it expanded its book of business to shore up the mortgage market as private capital evaporated. Those loans alone are projected to cost the agency $70 billion.
The agency insures $1.1 trillion worth of mortgages and backs about 15 percent of the U.S. loan originations for home purchases, almost quadruple the 4 percent share it covered in 2007. About 9.5 percent of loans insured by the FHA are at least 90 days delinquent.
The president’s budget estimate will probably reflect an improved outlook if only because the earlier independent actuarial report assumed that home prices would only rise by 1 percent in 2012. The S&P/Case-Shiller index of property values in 20 cities increased 6.8 percent for the year. The Federal Housing Finance Agency said home prices jumped 6.5 percent in the year through January.
“That’s the direction things have been headed for a while now, so I think it’s a question of magnitude,” Julia Gordon, director of housing finance and policy at the Center for American Progress, a group aligned with Democrats, said in a telephone interview. “Certainly the picture can’t have improved dramatically in three months.”
The FHA is required to keep enough cash to cover all expected future losses and must take a taxpayer subsidy if its projected revenue falls short. The chances of avoiding a subsidy depend on whether it can earn enough from insuring high-quality new loans to offset the bad ones. To accomplish that, agency officials have taken steps including raising fees.
The FHA’s finances are complicated by declining interest rates, which give newer borrowers an incentive to refinance out of the FHA portfolio. The rate at which the agency loses those borrowers will affect its bottom line.
“These trade-offs could show a net effect of not a whole lot of difference between the current forecast and the actuarial view, but the drivers behind that could be very different,” Stevens said.
The budget will show that losses persist in particular in the FHA’s reverse-mortgage program, according to two people familiar with discussions at the agency who asked not to be named because the budget hasn’t been released. The FHA backs 90 percent of such mortgages, which enable homeowners age 62 or older to withdraw equity and repay it only when their homes are sold. The FHA already has set some new limits on the program to rein in costs and could institute further caps on the amount of equity borrowers are able to withdraw, the people said.
George Gonzalez, a spokesman for FHA, didn’t reply to requests for comment on losses in the reverse-mortgage program.
The budget prediction will be closely watched in Congress, where both Democrats and Republicans are working on legislation that would further tighten FHA’s lending.
Leaders of the Senate Banking Committee have pledged to work on a bipartisan bill to restructure the agency. Republicans in the House of Representatives are working on their own measure.
Under consideration are policies that would reduce the share of the government guarantee on an FHA loan, which now stands at 100 percent, possibly through a risk-sharing arrangement with private guarantors. Lawmakers are also considering policies that would limit the agency’s role to providing insurance to low- or moderate-income borrowers. Currently, borrowers at any income level can qualify for FHA coverage.
FHA Commissioner Carol Galante has said the agency could avoid taking Treasury aid even if the president’s budget shows a shortfall. The agency has until the current fiscal year ends on Sept. 30 to determine whether it must take aid from Treasury to balance its books.
Critics of the agency say it needs to change even if it manages to avoid drawing a subsidy this year.
“FHA is not out of the woods, and the reason it’s not out of the woods is it is one moderate middling to moderate recession away from catastrophe,” Edward Pinto, a resident fellow at the American Enterprise Institute, which supports free markets, said in an interview. “FHA doesn’t price for risk. It doesn’t underwrite for risk.”
Meanwhile, supporters of the FHA say they’re worried the agency will go so far in its efforts to shore up its finances that it won’t be serving the low- and moderate-income home buyers it was created to help.
“Is every single step they’ve taken a good idea from the point of view of access to credit?” Gordon said. “I’m not sure. It’s getting pretty expensive to get an FHA loan.”
To contact the reporter on this story:
Clea Benson in Washington at firstname.lastname@example.org;