Audit shows housing agency facing shortfall

FHA taking steps to raise revenue, avoid a taxpayer bailout

New York TimesNovember 16, 2012 

— The Federal Housing Administration, a government agency that insures mortgages, said Friday that it was taking steps to shore up its books and avoid a taxpayer bailout.

An independent audit released on Friday projects that the agency’s expected losses will swamp its anticipated revenue, with a shortfall amounting to about $16.3 billion in its portfolio of insured home mortgages. That has raised the question of whether it will need an infusion of cash from taxpayers for the first time in its eight-decade history.

“This is the first time that they’ve totally run out of money,” said Rep. Spencer Bachus, R-Ala., speaking with reporters Thursday. “They have about $600 million, as I understand, that they’re burning through. And within a month, because of the number of foreclosures, they indicated they will have to come to the American people and ask for money.”

But federal housing officials stressed that the shortfall was projected, and that they were adopting measures to avoid tapping taxpayer funds. Shaun Donovan, the secretary of housing and urban development, announced a series of steps to reduce losses and increase revenue at the FHA.

These measures include bumping up its annual mortgage insurance premiums on new loans by 10 basis points. That will cost borrowers about $13 a month, Donovan said. The FHA also will sell off about 10,000 delinquent loans each quarter, increase short sales of homes where the loan exceeds the value and amplify its efforts to keep families in their homes, avoiding costly foreclosures.

The FHA expects these changes, plus other measures it recently put into effect, to contribute $8 billion to $10 billion to its overall value in fiscal years 2013 and 2014. The agency said the new steps would begin as soon as January.

The agency also is asking Congress for new administrative capabilities to better manage its portfolio of loans and cut losses. “We need help from Congress,” Donovan said.

In a meeting with reporters, Carol J. Galante, FHA’s acting commissioner, said, “It’s literally impossible to say that we will or won’t need a draw” from the Treasury at this point. “We’re doing all this to increase the likelihood that we will not.”

The FHA insures a portfolio of more than $1 trillion in mortgages. The new actuarial report shows that it expects losses on its portfolio of loans originated between 1992 and 2009, including about $70 billion in expected insurance claims on loans endorsed between 2007 and 2009. The agency anticipates profits on insured loans originated from 2010 on.

During those years, some of the worst of the housing downturn, the FHA continued to provide insurance on loans to help stabilize the housing market. “At some level, the government has already accepted” losses on those loans, Galante said. “They’re obligations of the government at this point.”

The FHA also said loans where the seller put down money for a buyer’s down payment were a significant drain on its books.

Such “seller-funded down payment assistance” loans make up only 4 percent of the FHA’s portfolio but account for 13 percent of its seriously delinquent loans. The FHA said it expected to lose $15 billion on such loans, which it no longer insures.

Despite the projected shortfalls, the FHA does not have an immediate need for cash, housing officials stressed.

The determination on whether FHA needs to draw on the Treasury will come next fall, said federal housing officials. In February, the White House will perform its own projections of FHA’s capital needs as part of its budget. Then, the FHA will reassess its books as the fiscal year ends in September, and might request a bailout to shore up its capital ratio at that point. Congress would not need to approve an FHA draw from the Treasury.

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