FHA Cash Reserves Level Lowest in 75 Years but Agency Still Has $31B as Cushion

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FHA Cash Reserves Level Lowest in 75 Years but Agency Still Has $31B as Cushion

Posted by Alex Finkelstein 11/13/09 1:01 PM EST
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(WASHINGTON, D.C.) -- Capitol Hill media are in a flutter today over the Federal Housing Administration's announcement that its Cash Reserve Fund has deteriorated to $3.6 billion - the lowest in the agency's 75-year history.

Shaun Donovan

But HUD Secretary Shaun Donovan doesn't see it as a crisis event right now because the FHA's Financing Fund is strong. This fund is separate from its Cash Reserve Fund and is used to pay claims by lenders on existing loans that default.

The two funds combined total $31 billion, or more than 4.5 percent of the agency's outstanding insured mortgages. The FHA is part of the Department of Housing and Urban Development (HUD)

The FHA's cash reserves have plummeted to $3.6 billion, compared with $685 billion in outstanding insured loans - a ratio of 0.53 percent that is far below the 2 percent required by Congress and a fraction of the 6.4 percent reserve ratio in fiscal 2007.

Still, Donovan told the Congress Thursday (Nov. 12), the FHA doesn't need a taxpayer bailout at this time. But he emphasized, "It is absolutely critical that going forward, we build that cushion back up.''

He said that when credit markets seized up at the height of the financial crisis, FHA picked up the slack and now holds as much as 30 percent of the mortgage market - including guaranteeing more than half of all home loans held by African-Americans and nearly 60 percent of mortgages held by Latin-American borrowers.

Overall, it insured nearly a quarter of all new loans made this year, including about half of all loans to first-time homebuyers. The FHA backs about 5.3 million mortgages, up from about four million three years ago.

About 17 percent of FHA borrowers are at least one payment behind or in foreclosure, compared with 13 percent for all loans, according to the Mortgage Bankers Association.

John A. Courson, president and CEO of the MBA, called the FHA's reserves disclosure "a major wakeup call for FHA and the lending community, but no reason to panic."

Courson said, "The two percent reserve requirement was established in order to ensure that FHA could stand the stress of a major housing and mortgage market event. It is safe to say that FHA is facing that type of event today."

The FHA doesn't make loans; it insures lenders against defaults by borrowers.
Borrowers are willing to buy the insurance because FHA-backed loans require down payments of only 3.5 percent of the purchase price.

But Donovan said the agency is considering raising the minimum down payment, as well as insurance premiums for borrowers - moves that would mean fewer people would be able to get loans. The FHA raised the limit this year from 3 percent.

Rep. Barney Frank (D-MA)

Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee, said he's concerned that higher unemployment could curtail the agency's ability to back loans.

"We're just going to keep watching them carefully'' to determine whether they need congressional help to stay above water, he said.

Frank also said he has proposed taking $2 billion from funds repaid after the Wall Street bailout to "lend money to people facing foreclosure because of unemployment," according to the Boston Globe. "I am pressing hard to get that done. I believe we can substantially reduce that second wave if we do that.''

Sarah Rosen Wartell, a former FHA official who is now executive vice president of the Center for American Progress, a Washington think tank said, "Today's housing market is the 100-year flood.

Sarah Rosen Wartell

"Congress established the capital reserve fund in 1990 to protect against unforecasted claims, but few imagined house price declines like those we have experienced already.

"And despite the fact that spillover from toxic conditions in the subprime market and poor policy choices in prior years left FHA with even more significant losses than the down economy would produce, it appears more likely than not that FHA will withstand those conditions without calling upon taxpayer resources."

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