FHA is SOL
Just as we forecast, the Federal Housing Administration revealed yesterday that it will likely need a government bailout. The results of an external audit (after being suddenly delayed for a week) showed the FHA’s capital cushion to be just 0.53% of its portfolio of insured mortgages. That’s way below the 2% mandated by Congress.
In other words, the FHA has just $3.6 billion in reserves to back up a $679 billion book. That’s into the Fannie Mae stratosphere of leverage insanity, worse than anyone expected, and way, way beyond the Wall Street risk taking our government has so publicly vilified.
Of course, a huge portion of these loans are easy-money, 3.5%-down mortgages designed to replace the subprime market and keep housing afloat during the last few years… and we’ve chronicled before their alarming rates of delinquency. The FHA’s auditors said that under adverse housing conditions, the administration could be out of money by 2011 and require a $1.6 billion injection. We hasten to add last year’s audit forecast the FHA would have a $15.8 capital cushion today… only off the actual reserves by about fivefold.
But when the FHA comes to Capitol Hill with their tin cup, don’t call it a bailout. “There is no extraordinary action that Congress or anyone else needs to take,” said HUD Secretary Shaun Donovan. He’s right… long ago, Congress granted the FHA to borrow from the Treasury with relative impunity.
The FHA is also quick to point out that it has about $26 billion in a “financing fund” — a pool of money used to pay claims on defaulted loans. Coupled with reserves, they claim it’ll be enough because — of course — it’ll be different this time: “The story of FHA’s financial status at the end of FY 2009 is, then, the tale of two portfolios,” Donovan told Congress. “The older portfolio has high rates of delinquencies and is expected to have high rates of insurance claims in the future. The new portfolio, which soon will be larger than the older portfolio, is expected to have more modest claim rates over the life of the loan guarantees.”