FHA in Peril: Housing Policy Experts

The Federal Housing Administration is in peril, with it capital position highly uncertain according to housing policy experts. The current situation could mean big changes ahead for FHA, said members of a panel discussion hosted by housing public policy organization The Urban Institute on Thursday.

The current capital position of the administration problematic as a result of the housing crash, they said, with several options FHA can take to shore up its Mutual Mortgage Insurance Fund as well as the potential for a second Department of Housing and Urban Development (HUD) Reform Act.

“There is substantial risk that FHA’s likely going to have a negative net worth [at some point],” said John Weicher, director of Hudson Institute’s Center for Housing and Financial Markets. “Therefore, under current law, it could require Congressional appropriation for the Mutual Mortgage Insurance Fund.”

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Noting FHA’s ongoing claim it is the only government agency that operates entirely from self-generated income, that may no longer be the case in the coming years for FHA he said.

“So far, that has been true, but there’s significant risk that statement will have to be changed,” he said.

The panelists noted the effectiveness of FHA through the housing crisis in providing access to credit for those who otherwise would not be able to obtain it and to keep people—including older Americans—in their homes through FHA’s programs, spanning reverse mortgages.

“Reverse mortgages provided by FHA are the one secure channel for the people that want to access that kind of [home equity] financing,” said Eric Belsky, managing director of the Joint Center for Housing Studies of Harvard University. “FHA is still a leader in that space.”

In terms of some of the options to shore up the forward mutual mortgage insurance fund, the Mortgage Bankers Association’s Vice President of Research and Economics Michael Frantantoni noted three tried-and-true possibilities: increase premiums, tighten credit and improve execution for FHA through actions such as monitoring fraud or improving loss mitigation.

“My concern at this stage is because FHA finds itself in this situation, it may have to take other defensive actions,” said Belsky. The question is: How much appetite is there to try to ensure that credit continues to flow in important ways for public policy reasons while defending taxpayers?”

FHA undergoes an annual independent financial audit, expected to be released next week. Bloomberg News reported this week that sources familiar with the report have alluded to FHA’s needing to seek assistance from the Treasury in order to improve the agency’s capital position.

Written by Elizabeth Ecker

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  • The HECM program has been in significant trouble for the last four fiscal years.  HUD had to take over $2.2 billion from its capital reserve fund to shore up the HECM fund ($1.74 billion during fiscal 2010 and another $535 million during fiscal 2011).  Until the audit or actuarial report for fiscal 2012, there is no way to tell if funds again allocated into the HECM portion of the MMI Fund.

    The HECM is one of those programs which has been eating up the capital position of HUD over the last four fiscal years and some say in the GI fund for even longer.  The GI fund is not as critical to the HECM program than the MMI Fund, although it is important.

    For those who are not familiar with the structure of Funds at HUD in relation to the HECM program, the financial results for HECMs generated before October 1, 2009 are reported in the GI Fund.  HERA mandated that the results for HECMs generated after September 30, 2008 be reported as part of the MMI Fund. 

    An over simplistic view of ongoing programs in the GI Fund is that they continue until discontinued by Congress and those in the MMI Fund must have an overall positive capital balance to continue.  Since being transferred to the MMI Fund, continuation of the HECM program is not as sure as it might have been in the GI Fund.  But there are some industry leaders who know the funds much better, claim that the HECM portion of that fund may quickly become negative.

  • Based on the atmosphere in DC, there is real reason for concern about the future of FHA as it is currently configured.  With the fiscal cliff quickly approaching, some delay tactics will no doubt go into place but will programs be rescued that in trouble or will they merely be covered to the extent of government guarantees and then be allowed to simply lapse.

    The timing from a potential perspective could not be worse.  This is not a great time for concern over meeting legislated tests but that is where FHA finds itself.  The next few months will be interesting.  Could the President issue one of his hundreds of executive orders (“EO”) to keep FHA functioning this next year only to incur the wrath of the House and find his EO challenged in federal court.

    The President and the Senate have no mandate.  The House seems vested with the mandate to be the obstructionists they have shown themselves to be.  Depending on financial statement results, the battle may be ON!!

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