The FHA Glass: Half Full, Half Empty Or Broken?

The Federal Housing Administration (FHA) is either another entity that is ‘bailout broke’ or an important agency that is helping the housing market recover. This debate is occurring in congressional hearings, and advocates on both sides are watching closely.

In testimony to the House Financial Services Committee in February, Rep. Randy Neugebauer, R-Texas, said the FHA's ‘financial condition continues to deteriorate,’ and ‘we are well on our way for a taxpayer-funded bailout.’ Neugebauer, chairman of the House Financial Services Committee's Subcommittee on Oversight and Investigations, maintained that the FHA has exceeded its historical mission and that the agency's shortcomings threaten the American taxpayer.
In response, FHA Commissioner Carol J. Galante noted that the number of foreclosures is half as many as in early 2009, housing construction is growing faster than at any time since 2008 and increasing home values lifted 1.4 million borrowers above water in 2012.

‘Much of the progress that we are seeing in the housing sector has been possible because of the FHA, which has provided access to homeownership for millions of American families and without which the crisis would have been much deeper,’ Galante testified. Quoting Moody's Analytics, she said that if not for the FHA, house prices would have fallen 25% further than they did during the crisis.

Galante acknowledged that the FHA has been stressed lately. The FHA's fiscal-year 2012 report to Congress on the financial status of the agency's Mutual Mortgage Insurance Fund (MMIF) indicated that the fund's capital reserve ratio fell below zero to -1.44%, and the fund's economic value was negative $16.3 billion. That figure, from an independent actuary, measures the total net worth of the FHA's portfolio if the FHA were to pay all expected claims for the next 30 years, which Galante described as ‘a runoff scenario where no new loans are insured.’

Edward Pinto, resident fellow at the American Enterprise Institute in Washington, D.C., rejects the argument that the FHA is helping the housing market and insists that the capital reserve ratio is a problem, no matter what the scenario.

‘Any way you compute it, they have a negative net worth,’ he says. ‘They are fiscally challenged.’
That is important, Pinto says, because the last recession ended in 2009, so the U.S. should be in the fourth year of expansion. ‘It would be very unusual if we got to 2016 without a recession,’ he says. ‘The FHA is uniquely unqualified to meet a recession.’

Pinto adds that the FHA has failed in its mission to help low- and middle-income earners buy homes, and a disproportionate percentage of foreclosed homes are in low-income neighborhoods.

‘The FHA has looser underwriting standards and higher debt ratios than private sector insurance,’ he says. ‘The FHA is putting in place practices that put working-class families in harm's way.’

Not so, says Julia Gordon, director of housing finance and policy at the Center for American Progress in Washington, D.C.

‘Those folks like to look at lower-income neighborhoods and say the FHA caused this, but those neighborhoods were targeted by subprime lenders,’ Gordon states. ‘When the financial crisis happened and liquidity dried up, the FHA was able to keep some money flowing in the housing market. So it was a shock absorber.’

Gordon believes that the bailout talk is just political posturing. ‘Yelling bailout right now is a way to get attention,’ she adds. ‘The two percent capital reserve ratio is an early warning mechanism. If you go below that, you should watch out and make sure your financial house is in order.’

According to the FHA's website, the agency has done this through reforms to strengthen the MMIF, including new policies to improve loan quality, strengthened lender enforcement and improved premium revenues. There have been five premium increases, and another premium increase will begin in April. Also according to the FHA, the actuary projects that the MMIF capital reserve ratio will be positive by fiscal year 2014 and reach 2% during fiscal year 2017.

Other industry experts say reform can be tricky.

‘Homeownership is the American dream, and when you restrict that, it is controversial because it sounds like elitism,’ says Dr. Gregory Price, chairman of the economics department at Morehouse College in Atlanta, adding that blame for the housing crisis can be spread from the government-sponsored enterprises to Wall Street to Main Street. ‘We point fingers, but we are all collectively responsible. We ride waves of prosperity, and we think it will never end.’
Chris Sorenson, founder of the Los Angeles-based Homeownership Education Learning Program, says that despite being overwhelmed by subprime lenders from 2007 to 2009, the FHA has helped the housing industry.

‘With the aggressive actions taken by the FHA to rid themselves of many who never should have been originating FHA loans in the first place, along with massive increases in insurance premiums, they are to be considered one of the few bright spots in our beleaguered federal government,’ he says. ‘Had the FHA not funded, with noted exceptions, the amount of loans they did, the carnage could have been far worse, and the bailouts would have far exceeded the potential, temporary bailout that exists today.’

But it is not a bailout, Gordon insists. ‘AIG and Lehman Brothers were bailouts,’ she says, noting that the FHA can draw on budget authority from the Treasury. ‘This is a different situation.’

Nora Caley is a Denver-based freelance writer. She can be reached at


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