The Federal Housing Administration, faced with continuing losses from the housing bubble, will issue a financial analysis next week setting the stage for what could be its first draw from the U.S. Treasury in its 78-year history, according to three people briefed on the report.
The government-backed mortgage insurer, which warned in last year’s report that its insurance fund was being drained, has raised premiums and tightened credit standards in an effort to avoid asking for a taxpayer subsidy.
Still, the improved quality of recent FHA-backed loans — now comprising 15 percent of U.S. mortgages for home purchases — may not offset continuing defaults from loans made from 2005 to 2008, said the people, who spoke on condition of anonymity because the report is not yet final.
The annual report to Congress, based on analysis by an outside actuary, could hamper a White House effort to expand FHA’s role as an insurer for underwater borrowers. FHA officials and supporters are preparing to counter the downbeat projections by highlighting how the agency helps the economy.
“If FHA alone simply stopped doing business, we would have been propelled down into another double-dip recession,” said John Griffiths, an analyst at the Center for American Progress, a research organization aligned with Democrats.
The FHA was established in the wake of the Great Depression to help first-time and low-income Americans buy homes. It 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. Unlike Fannie Mae and Freddie Mac, the mortgage finance companies under U.S. conservatorship, FHA itself does not package loans into securities or guarantee principal and interest payments.
FHA spokeswoman Tiffany Thomas Smith declined to comment on next week’s report.
The FHA’s troubles stem from rising defaults on mortgages it insured during the peak years of the housing bubble. The agency now insures about 7.6 million loans with total outstanding balances near $1.1 trillion, triple the amount it backed five years ago.
The agency could cover its costs in the past because revenues from its insurance premiums exceeded claims. This year, it avoided taking a taxpayer subsidy despite mounting claims because it received a one-time payment of nearly $1 billion from a legal settlement over mortgage servicers’ flawed foreclosure practices.
Financial market players already widely regard the FHA’s insurance fund as broke, so the report shouldn’t have a big impact, said Paul Miller, managing director at FBR Capital Markets Corp. Banks already are offering FHA loans only to the most creditworthy borrowers because they’re afraid they’ll be forced to take the loss if the borrowers default, he said.
“It’s going to be more negative headlines than anything else,” Miller said. “The implications of the fund struggling have already been seen in the market.”
The agency’s financial report last year projected that loans issued prior to 2009 would result in $26 billion in losses, $14 billion of that from a subset of 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 seller-funded down payment loans beginning in 2009. Still, the risk of many of those mortgages has been transferred to the agency’s more recent books of business because they have been refinanced under FHA’s streamline program, which waives many underwriting requirements to enable borrowers to take advantage of low interest rates. More than 17 percent of all FHA loans were delinquent in September.
FHA’s finances rebounded, at least temporarily, after it increased insurance premiums on new single-family loans in April by 75 basis points to 1.75 percent of loan amount. In August, the agency predicted it would end fiscal-year 2012 with $3 billion in its reserve account.
The agency’s 2012 report is expected to be more pessimistic than last year’s partly because it is changing its economic modeling, according to three other people briefed on the procedures. This year’s report, based on the work of an independent actuary, is expected to include less rosy expectations for home prices and a revised assessment of loans from earlier years that have been refinanced more recently.
If needed, Treasury can provide a financial backstop to FHA without prior approval from Congress. Still, spending tax dollars on a previously self-supporting program would give political ammunition to the agency’s critics.
“FHA has been used by the Realtors, by the homebuilders and by the administration as a stimulus program rather than as a responsible lending program,” said Ed Pinto, a frequent critic of FHA’s accounting methods who is a resident fellow at the American Enterprise Institute, which advocates free markets.
Supporters of FHA’s mission say its financial struggle shows that it was playing its proper role as an insurer during a time of crisis in the housing industry, not that its lending policies are flawed.
“Is FHA’s problem a systemic issue or was it a once-in-100 years-flood issue?” said bank consultant Brian Chappelle, a partner at Potomac Partners in Washington. “The data certainly looks like FHA was a victim to the 100-year flood.”