MUCH HINGES ON FHA’S ANNUAL REPORT

Sources: WSJ.com: Behind FHA Strains, a Push to Lift Housing: WSJ.com: Loan Losses Spark Concern over FHA; Rueters.com: FHA Says Won’t Need Congressional Support

On September 30, 2009, the Federal Housing Administration (FHA) is set to release information on the amount of money it holds in reserve. If that amount is lower than the congressionally mandated minimum and home prices decline further, the result could mean taxpayer assistance for the first time since the Agency’s inception.

The FHA is a government agency that provides guarantees on mortgages for homebuyers, inducing private lenders to loan money to those unable to pay large down payments or those with little equity. It is a part of the U.S. Department of Housing and Urban Development. The suspected low levels of reserve money come as the FHA has attempted to stabilize the housing market by increasing guarantees on loans.

Federal law dictates that the FHA must maintain reserves equal to at least 2 percent of the loans that it insures. In recent years, the Agency’s reserves have declined from 6.4 percent to roughly 3 percent in 2008. The decline is primarily due to the rising number of defaults. According to the Mortgage Bankers Association, an estimated 7.8 percent of FHA insured loans were 90 or more days late or in foreclosure. That number is up from 5.4 percent in 2007.

If the reserve is found to be below minimum standards and the agency requires a government bailout of some kind, it is likely that further limitations and restrictions would be put on who can receive FHA backing, making it even more difficult for borrowers to get financing.

Although the FHA’s position is that it will not need government assistance should its reserve fall below the minimum, the agency is expected to announce new ideas for improved oversight of its lenders this fall, as well as announcing who will fill the newly created position of Chief Risk Officer. Much depends on the information contained in the annual report of September 30.


Discussion Questions:

1) Which is worse, making it even more difficult for borrowers to get loans or seeing the FHA reserves fall below mandated minimums?
2) What can the FHA do to improve the oversight of its lenders?
3) Does the Obama Administration need to make FHA oversight a higher priority in his agenda?