An independent audit last month revealed that the Federal Housing Administration had a $16.3 billion deficit ($30.3 billion in cash reserves as of Sept. 30 to cover $46.6 billion in projected losses), most of which, accounted for loans backed between 2007-2009. Agency officials however have stressed that it has no immediate cash flow problem, and with the recovering housing industry in addition to lending policies could help stabilize the agency and remove the need for any potential tax payer bail out.
However, Housing and Urban Development’s Secretary Shaun Donovan warned during a Senate Hearing on Thursday that hasty changes to FHA’s lending policy could hurt the slowly recovering housing market.
FHA’s net work must not drop below 2% of the outstanding balances of the loans they guarantee, but the number of foreclosures and struggling home prices in the past few years have left FHA in the red, at -1.44%. A continued decline in their reserves could allow FHA to draw funds from the Treasury which is hasn’t done in 78 years due to losses on mortgages they backed in the past few years.
To help lessen the deficit, another increase on insurance premiums, changes in loan limits and approval process of new borrowers have all been discussed. Increases on insurance premiums would translate to an increase of approximately $13 more per month in premiums, for a new borrower of FHA backed loans. Some are arguing, however, that these increases could hurt housing recovery, making loans more expensive, especially for those who the program was designed for.
Secretary Donovan stated that by raising insurance premiums, streamlining short sales as well as selling off delinquent loans, FHA is lessening their deficit, although some are arguing that it isn’t quick enough. The result of whether financial assistance is needed or not will be determined at the end of the 2013 fiscal year.
