According to an independent actuary, the Federal Housing Administration (FHA) remains about 1.3 billion dollars in debt even after the agency received 1.7 billion in bailout money just earlier this year.
In the agencies 79 year history this year marks the first time that it has ever needed a bailout. Reaction to the news of a second bailout varied more or less along party lines. Republicans have argued that the FHA’s finances highlight the need for reform within the agency while democrats were more cautious and expressed optimism.
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Prospects for Improvement
The FHA is a very important part of the housing market because of what it’s responsible for. It insures low down payment mortgages and is regularly the only source of funding for home loan borrowers with modest incomes and/or poor credit scores.
A report from the U.S. Department of Housing and Urban Development (HUD) stated that bailout efforts to improve the FHA’s standing were showing signs of progress. Even though the FHA is still 1.3 billion dollars in the red, that figure represents a $15 billion improvement from where the agency was a year ago. And internal numbers from the FHA suggest that it will be able to replenish its cash reserves by 2015.
The FHA is now “on a sustainable path to fulfill its dual mission of supporting access to homeownership for underserved and low-wealth borrowers as well as supporting and stabilizing the housing market,” HUD Secretary Shaun Donovan said.
Implications of the FHA’s Cash Shortfall
The FHA’s problems began with the sub-prime mortgage crisis. As more homeowners became increasingly incapable of paying their ballooning mortgage payments. The housing industry went into a tailspin and private capital began to evaporate, making an already difficult situation even worse.
Accordingly, the FHA has had to make a number of adjustments in order to stay afloat. For example, it has tightened its credit requirements that allow Americans to qualify for a home loan. This has the direct effect of preventing more people from being able to get a loan. The rationale behind this is that the FHA wants to decrease the possibility that home loan borrowers default. Those with poor credit scores are statistically more likely to default than those with good credit scores.
Another step that the FHA has taken to get more money to balance its books is to raise insurance premiums on its loans. But there is a limit to how useful this strategy can be. If insurance premiums are too high the FHA risks the possibility that it will make homeownership too expensive for the very people that it is trying to serve. If those individuals don’t buy a home, then that’s obviously lost business.
A strong FHA remains an important part of the housing market and housing recovery. There is still much promise in the possibility that the FHA will become self-sustaining once more in the near future. However, the fact that the FHA is in the precarious situation of needing more bailout money shouldn’t go unnoticed. Perhaps it does suggest that reform may in fact be needed.
