The Federal Housing Administration (FHA) is requesting a $1.7 billion infusion of capital from the U.S. Treasury by Sept. 30 in order to shore up its reserves in light of recent losses – however, with a government shutdown looming, the timing of the bailout is still somewhat in question.
It is the first time the agency has requested a government bailout in its 79-year history.
In a letter to Sen. Tim Johnson, D-S.D., chairman of the Senate Banking Committee, and Sen. Mike Crapo, R-Idaho, raking member of the committee, FHA Commissioner Carole Galante explained that the agency played a critical role in providing access to mortgage financing in the years following the 2008 housing meltdown.
‘When the recent recession pushed our economy to the brink of collapse, FHA stepped in to provide access to mortgage financing as the private market retreated,’ Galante wrote. ‘FHA's Single Family program more than quadrupled its activity, accounting for over 20 percent of the market at the peak of the financial crisis.’
This, in turn, put considerable stress on the FHA's Mutual Mortgage Insurance Fund (MMIF), bringing its capital reserve ratio below the 2% threshold mandated under the Federal Credit Reform Act (FCRA).
An independent actuarial report late last year found the FHA's MMIF operating at a deficit of $16.3 billion.
The agency also incurred significant losses in its reverse mortgage program, also known as the Home Equity Conversion Mortgage (HECM) program, when millions of homeowners took out reverse mortgages, opted to take lump sum payments and then ran into financial problems.
In August, following passage in the House and Senate, President Obama signed into law the Reverse Mortgage Stabilization Act, which gives the Department of Housing and Urban Development (HUD) the power to make changes to the HECM program without congressional approval.
In order to bring the MMIF back to its required level, the FHA will need ‘to take a mandatory appropriation of approximately $1.7 billion on Sept. 30â�¦,’ Galante wrote, adding that the exact amount of the appropriation will be determined based on the FHA's receipts through that date.
In April, White House budget officials had projected an agency shortfall of $943 million for the current fiscal year. However, in her letter, Galante explains that the agency will need nearly double that amount due to a ‘decline in FHA endorsement volume in the last few months of the fiscal year – consistent with the trend in the broader housing market in response to higher interest rates.’
‘It is also consistent with the FHA's goal of reducing its footprint in the market,’ she wrote.
The request will not require congressional approval because the FHA has what is known as ‘permanent and indefinite’ budget authority, allowing it to tap the Treasury. As such, government officials are referring to the appropriation as an ‘accounting transfer’ and not a ‘bailout.’
What's more, Galante refers to the $1.7 billion figure as an ‘estimate’ because the agency recently implemented measures to increase its revenues, including requiring most homeowners with FHA-backed loans to carry the insurance throughout the full lifecycle of the loan – however, the resulting increased revenue from those measures will not be included in the accounting of the FHA's operations until after the fiscal year ends on Sept. 30.
As Galante explains in her letter, Federal Credit Reform Act (FCRA) rules mandate that the FHA draw upon the Treasury in the event its reserves dip below the required level. However, FCRA rules require that reserves be adequate as of current accounting – so even though the FHA has taken measures to bolster its revenue and, in fact, may not need a bailout, it must request one anyway.
‘Due to long-standing federal accounting procedures, this estimate will not be updated until the next budget cycle is completed a few months from now,’ Galante wrote.
Galante's letter points out that changing market conditions will also likely result in an improvement in the agency's fiscal picture by the end of this year. These factors include a 15% reduction in delinquency rates, a 91% reduction in early payment defaults, a 20% reduction in foreclosure starts and a 26% improvement in recovery rates on defaulted assets. She points out that the improvement in recovery rates alone is worth more than $5 billion.
The shortfall in reserves does not mean that the FHA is in need of cash to pay claims, Galante stressed. The agency still has more than $30 billion in liquid assets and is forecast to generate a total of $17 billion in revenue by the end of this fiscal year.
‘These are more than sufficient resources to allow FHA to fund its claims activity,’ she wrote.
In response to the request for Treasury draw, Sen. Crapo, a staunch advocate for FHA reform, issued the follwing response:
‘Unfortunately, the announcement comes as no surprise and is unacceptable. This failure reinforces the need for Congress to pass FHA and broader housing finance reform. Taxpayers have already been forced to provide hundreds of billions of dollars to Fannie Mae and Freddie Mac. FHA requiring nearly $2 billion for this year suggests that predictions of billions more in taxpayer liability could come to pass if we do not act on serious reform now.’
‘In July, the Senate Banking Committee passed the FHA Solvency Act of 2013 (S.1376) with broad bipartisan support,’ Crapo adds. ‘The bill would give the FHA tools to improve its financial condition, including strengthened underwriting standards, enhanced lender accountability measures, and reforms to the FHA's reverse mortgage program.’