The Federal Housing Administration’s mortgage insurance cash reserves fell to the lowest levels in recorded history, 0.53 percent. The FHA announced today FHA cash reserve levels have fallen below the congressionally mandated threshold. The annual independent accounting survey of the FHA came with the assessment that additional action needed to be taken to manage risk to prevent further losses.
The losses are attributed to a record drop in the housing market. FHA has stepped in to provide additional sources of funding for mortgage finance as private sources of funding have dried up. In the second quarter of 2009, nearly 50 percent of all first-time buyers in the entire housing market used FHA-insured loans.
While FHA cash reserves have dropped below the 2 percent threshold mandated by Congress, HUD Secretary Shaun Donovan said at a press conference today, “This is a temporary role which FHA has played in previous economic downturns. The Administration is committed to ensuring that the FHA steps back as private capital returns to the market. With this temporary increased role comes increased risk and responsibility. That’s why we are committed to closely monitoring market behavior patterns and economic risks so that we are prepared to enact reforms that ensure the FHA’s financial health moving forward.”
In response to the FHA’s announcement about their low cash reserve levels, the Mortgage Bankers Association released the following statement:
**”Today’s announcement is a major wakeup call for FHA and the lending community, but no reason to panic. The two percent reserve requirement was established in order to ensure that FHA could stand the stress of a major housing and mortgage market event. It is safe to say that FHA is facing that type of event today.
“We are encouraged by the corrective actions FHA has already announced and has begun implementing – the elimination of seller-funded down payments and the recent program changes to help it better manage its risk – that should help FHA come out of the current housing crisis positioned to continue its mission promoting more affordable mortgage credit for borrowers.
“MBA and its members, who originate the vast majority of all FHA loans, have long been leading efforts in Washington to give FHA the tools it needs to best serve its mission. That is why we are continuing to encourage Congress to appropriate the critical funding that FHA needs to hire and maintain staff and update its technology.”**
The National Housing Conference followed with a statement from Conrad Egan, the president and CEO:
**“FHA’s annual audit released today confirms that with $31 billion in total reserves the agency will not need to seek support from the American taxpayer under even some of the most extreme economic scenarios. Experts also emphasized that the toll the housing crisis has taken on FHA’s reserves illustrates the agency’s pivotal role in the housing recovery.
Specifically, as private lenders tighten their credit standards and capital sources are diminished, FHA continues to fill the void in the market by insuring single- and multi-family loans to qualified buyers who might not otherwise be able to secure a loan at a reasonable cost. Almost 50 percent of all first-time homebuyers in the housing market used an FHA loan in the second quarter of 2009 alone.
The agency has provided this same type of temporary support to the nation’s housing markets over its 75 year history, resulting in an eventual net positive return for taxpayers. Of course, with an increased FHA role there is initial financial risk, but many experts agree that the worst is over for the current crisis. Default rates on FHA loans made recently are not anticipated to be as great as previous loan defaults. The credit quality of agency-insured borrowers has gone from an average FICO score of 633 two years ago to 693 today, making the loans that the agency is insuring now less risky.
FHA does face immediate challenges and is currently implementing the necessary reforms. In particular, the agency is emphasizing risk management that includes additional real-time monitoring of portfolio performance and delinquency, default and economic conditions, in order to help minimize risks to remaining capital. FHA is also tightening rules for appraisals, streamline refinances and lender approvals to help prevent further erosion of and ensure increases in its financial reserves.”**