The Federal Housing Administration, which ended fiscal-year 2012 with a $16.3 billion insurance-fund deficit, will raise premiums and sell delinquent loans to avoid taking aid from taxpayers for the first time in its 78-year history, agency officials said Friday.
A report by an independent actuary released Friday shows the government mortgage insurer’s assets won’t cover projected losses on the $1.1 trillion portfolio of mortgages it backs due to mounting defaults on loans issued as the housing market collapsed. The FHA, an arm of the U.S. Department of Housing and Urban Development, is hoping its new revenue-generating policies will be enough to offset the shortfall during the next fiscal year.
“This set of measures will reduce the likelihood that FHA will need to tap into Treasury assistance next September,” HUD Secretary Shaun Donovan said during a phone call with reporters.
The agency’s mounting losses could create political challenges for the Obama administration at a time when Republicans and Democrats are engaged in negotiations over how to solve the nation’s fiscal woes. They also could hamper a White House effort to expand FHA’s role as an insurer for borrowers whose homes are worth less than they owe on them.
“The FHA has a responsibility to manage their funds responsibly and keep their books in order, but their economic value has completely deteriorated in the last year,” Senator David Vitter, a Louisiana Republican, said in a statement. “This is an absolute failure of leadership by the current FHA management, and we must hold them accountable to taxpayers.”
Donovan defended the agency’s role as an economic backstop. “During this critical period in our nation’s economic history, FHA has provided access to homeownership for millions of American families while helping bring the housing market back from the brink of collapse,” he said.
In advance of the report, FHA officials emphasized the role the agency plays in the economy as a backer of home loans for low-income borrowers who can’t make large down payments. Agency officials have been sending out messages on Twitter with the hashtag #FHAmatters.
Senate Banking Committee Chairman Tim Johnson, a South Dakota Democrat, said he was “deeply concerned” by the actuary’s findings and would call Donovan to testify at a hearing after Thanksgiving.
Most of the FHA’s new revenue-generating policies will go into effect in January. The annual premium FHA charges borrowers in return for guaranteeing loans will rise by 10 basis points on new mortgages, a cost of about $13 per month for the average borrower. The agency also will no longer allow some borrowers to stop paying premiums after 10 years.
FHA will provide deeper levels of payment relief for borrowers who receive loan modifications to avert foreclosure.
In addition, FHA will expand short sales and continue auctioning off at least 10,000 delinquent loans every quarter, urging investors who buy them to take steps to keep families in their homes.
FHA Acting Commissioner Carol Galante declined to speculate on whether these measures would be enough to keep the agency from seeking Treasury assistance.
“At this point in time, it’s literally impossible to say whether we will or won’t need a draw,” she said during a briefing for reporters in Washington. “We are doing this to increase the likelihood that we will not.”
More than 17 percent of all FHA loans were delinquent in September, according to data on the agency’s website. The agency has lost $70 billion on loans it insured from fiscal years 2007 through 2009.
The report blames the fund’s losses largely on loans in which sellers were allowed to cover the down payment on behalf of the buyer, often by inflating the price of the house. Congress banned the FHA from backing such loans beginning in 2009.
FHA currently backs 15 percent of U.S. mortgages issued for home purchases. The agency provides liquidity to the housing market by insuring lenders against losses on loans with down payments as low as 3.5 percent. Lenders are made whole if the mortgages default.
In the past two years, FHA has raised premiums and tightened credit standards in an effort to avoid seeking government aid. This year, it avoided taking a subsidy despite mounting losses because it received a one-time payment of almost $1 billion from a legal settlement over claims that mortgage servicers botched foreclosures.
FHA’s finances rebounded, at least temporarily, after it increased insurance premiums on new single-family home loans in April by 75 basis points to 1.75 percent of the loan amount.
For the agency’s 2012 report, its actuary changed the economic modeling to include less-optimistic home-price projections and a revised assessment of loans from earlier years that have been refinanced more recently.
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