Bachus: FHA will seek first bailout in 78 years

4-FHA-logoNearly one year ago to date, we published a blog post titled, “Is FHA the next housing bailout?” Fears surrounding the federal mortgage insurer’s reserve fund, or lack thereof, really haven’t dissipated since then. In fact, the state of the FHA reserve fund has been in question for years.

Both the public and private mortgage markets reacted to the downturn by instituting very strict lending conditions. Thus, during the height of the downturn, the FHA became a refuge for would-be borrowers seeking relaxed credit-score and down payment requirements.

The FHA’s growing slice of market became a real cause for concern of many within the industry.

“We support FHA’s role as a source of financing for first-time homebuyers and other underserved groups” said Michael D. Berman, chairman of the Mortgage Bankers Association, in congressional testimony last year May. “However, because of the wide disparity between FHA’s down payment requirement of 3.5 percent and the QRM’s requirement of 20 percent, MBA is concerned that the FHA programs will be over-utilized. While FHA should continue to play a critical role in our housing finance system, MBA firmly believes that it is not in the public interest for a government insurance program like FHA to dominate the market, especially if private capital is available to finance and insure mortgages that exhibit a low risk of borrower default.”

Damage is done; FHA needs cash

While the FHA’s recent numbers suggest some positive trends, it seems the damage has already been done.

Several news outlets speculated earlier this week on the FHA’s possible insolvency, and on Thursday, a government official confirmed those fears in a press conference, reports Clea Benson and Cheyenne Hopkins of Bloomberg:

The Federal Housing Administration will need billions of dollars in aid from the U.S. Treasury before the end of the year to fill a financial hole caused by defaults on mortgages it insures, House Financial Services Committee Chairman Spencer Bachus said today.

FHA will propose increases in the premiums it charges to insure mortgages as one solution to its financial problems, Bachus said during a press conference in Washington. Still, that won’t be enough to offset its near term need for cash.

The agency is “burning through” its last $ 600 million and FHA officials have briefed him that they will need a financial backstop within a month, the Alabama Republican said during a press conference in Washington.

The need for a government infusion of cash will mark the first such occurrence in the FHA’s 78-year history. Up until this point, the FHA hasn’t commented on the matter. The FHA will release an annual report on Friday which is expected to show that their losses are greater than their congressionally mandated reserve fund.

In the opinion of Mr. Bachus, the economy is more to blame than any shortcoming of the FHA. “It’s basically a function of a bad economy,” he said.

In my opinion, it’s the convergence of a bad economy and less-qualified borrowers.

HSH Associates Financial News Blog

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