Report: 50 Percent Chance FHA Will Need Bailout

Published December 23, 2015

The Federal Housing Administration's cash reserves have fallen so low that there is a "close to 50 percent" chance the agency could run out of money and require a taxpayer bailout in the next year, according to the annual independent audit of the FHA's finances.

The audit, to be released Tuesday by the FHA, estimated that the value of the agency's reserves stood at $2.6 billion as of Sept. 30, down 45 percent from an already low $4.7 billion last year. The drop reflects the impact of rising home-loan defaults amid falling home prices, which together generate greater losses on the sale of foreclosed homes.

The FHA's perilous state underscores one of the hidden costs of the U.S. government's extraordinary efforts to rescue the housing market. In the past four years, as private lenders have pulled back from the mortgage market, the FHA's market share has swollen. It backed one third of mortgages used to finance home purchases last year, up from around 5 percent in 2006. The FHA doesn't make loans but insures lenders against defaults on mortgages that meet its standards.

The report comes even as Congress considers returning the maximum FHA loan limits to higher levels. The limits fell modestly in about 600 counties on Oct 1.

The outsize role the FHA has played in the mortgage market has depleted its resources. Every year, independent auditors use a complex formula to determine the so-called economic value of the agency's reserves by making estimates about future losses and then subtracting that amount from existing reserves.

Using that measure, the FHA's projected reserves, which are set aside to cover future loan losses, accounted for just 0.24 percent of all $1.1 trillion in mortgages insured, as of Sept. 30. That is down from a 0.5 percent reserve ratio last year. Federal law requires the agency to stay above a 2 percent level, which it breached two years ago. The audit and forecast were prepared by Integrated Financial Engineering Inc. of Rockville, Md., an analytics firm.

Still, so far the FHA hasn't run out of money and hasn't needed any Treasury funds. That is in part because the FHA has repeatedly increased homeowners' insurance premiums to raise cash and enforced tighter risk controls.

"Even in the tough economic environment, we've been successful in protecting the (insurance) fund," said Carol Galante, acting commissioner of the FHA, in an interview. "We still clearly see there are downside economic risks that we have to be vigilant about."

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