I know that there are plenty of people who wish the Federal Housing Administration would lower the 2% upfront premium for HECMs, but it doesn’t look like it will happen anytime soon.   Yesterday, the Wall Street Journal published an article about how the latest annual audit of FHA shows a steep drop in the capital cushion the US agency holds against losses from mortgage defaults. 

The audit, prepared by Integrated Financial Engineering Inc., estimated the economic value of the FHA’s insurance fund was $12.9 billion as of Sept. 30, down 39% from a year earlier.  According to the WSJ, the drop in economic value of the fund largely reflects estimates of how falling home prices and growing losses on the sale of foreclosed homes will increase claims paid by the FHA.

As of Sept. 30, the estimated value of the fund worked out to 3% of the total loans insured by FHA, down from 6.4% a year ago.  Federal law requires that the value be at least 2%, so if it should run short of money to any claims, US taxpayer funds would be used to make up the difference.

Thomas Lawler, an independent housing economist based in Leesburg, Va., said he sees a risk that losses on FHA loans will be large enough to require Congress to replenish the reserves.  Stephen O’Halloran, an FHA spokesman, said the insurance fund "remains on solid ground."

FHA Cash Cushion Has Fallen by 39%