FHA Disputes Whispers of Capital Reserve Problems

In the face of rumors that its capital reserve ratio is nearing the danger point, the head of the Federal Housing Administration (FHA) says that his agency does not need help from Congress. 

The Wall Street Journal reported this morning that the agency, part of the U.S. Department of Housing and Urban Development (HUD), might fall below the 2 percent capital reserve ratio demanded by Congress because of rising defaults on mortgage loans it insured.  

Responding to the Journal article, FHA Commissioner David Stevens this morning said, "Even if that level falls below 2 percent, FHA continues to hold more than $30 billion in its reserves today, or more than 5 percent of its insurance in force. Given this reserve level, FHA will not need a congressional subsidy even if the congressional capital reserve calculation falls below 2 percent."

Mortgage loans insured by the government have soared to the highest levels in two decades as borrowers have taken advantage of down payment requirements for FHA loans which are lower than those for other mortgages.

In the past two years, the number of loans insured by the FHA has soared and its market share reached 23% in the second quarter, up from 2.7% in 2006. FHA-backed loans outstanding totaled $429 billion in fiscal 2008, a number projected to hit $627 billion this year.

At the same time, defaults in FHA insured loans are depleting its reserves.  According to the Journal, 7.8 percent of FHA loans were 90 days or more late or in foreclosure.  This is comparable to the national average, but because of the low down payment requirement, sometimes as low as 3.5 percent, a borrower is less likely to hang on and try to save his home and FHA takes a bigger hit.

Should the reserve funds fall to dangerous levels, the FHA could either raise the premiums that borrowers pay for the agency guarantee or petition Congress for taxpayer funds to boost agency reserves

"FHA's full faith and credit insurance means that there is no risk to homeowners or bondholders independent of the congressional capital reserve requirement," Stevens said, adding that FHA continued to generate income for taxpayers.

Department of Housing and Urban Development Secretary Shaun Donovan said in June, "there's a better than even chance that we will stay above the two percent reserve threshold. That suggests, not just for the 2010 business, but overall for the portfolio, that we'll more than likely to stay out of a broader need for any taxpayer funding."

According to the Journal, the only thing the agency is obligated to do is notify Congress if it falls below capital requirement.  This could, however lead to a demand that FHA reduce its lending which is credited with helping to improve house sales.

The FHA's mandated 2 percent reserve means a minimum of $3 billion during the current fiscal year and $4 billion next year.  The agency's assets have increased from $27 billion to around $31 billion in the past year.  A recent audit put the value of the fund at $12.9 billion last year or around 3 percent of all FHA backed loans.