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FHA to Boost Fees, Sell Delinquent Loans to Close Deficit

By Clea Benson and Cheyenne Hopkins
November 16, 2012 5:57 PM EST 81 Comments
A worker removes furniture from a foreclosed home in Richmond, California. The Federal Housing Administration insures a portfolio of about $1.1 trillion in home loans and now backs 15 percent of U.S. mortgages for home purchases. Photo: Justin Sullivan/Getty Images
A worker removes furniture from a foreclosed home in Richmond, California. The Federal Housing Administration insures a portfolio of about $1.1 trillion in home loans and now backs 15 percent of U.S. mortgages for home purchases. Photo: Justin Sullivan/Getty Images

The Federal Housing Administration, which ended fiscal year 2012 with a $16.3 billion insurance-fund shortfall, will raise premiums and sell delinquent loans to avoid taking aid from taxpayers for the first time in its 78- year history, agency officials said today.

The government mortgage insurer’s assets won’t cover projected losses on the $1.1 trillion portfolio of mortgages it backs due to mounting defaults on loans issued as the housing market collapsed, according to a report issued today by an independent actuary. Agency officials are hoping the new policies will be enough to offset the shortfall during the next fiscal year.

The report’s negative outlook set off a renewed debate among federal lawmakers over the proper role of government in the U.S. housing market. Republican members of Congress responded today with calls to shrink the government’s footprint. Together, the FHA and U.S.-owned Fannie Mae and Freddie Mac guarantee more than 90 percent of U.S. home loans.

“As if we needed another example to show we need broad comprehensive reform in ending these taxpayer giveaways, this is one more example of it,” Representative Scott Garrett, a New Jersey Republican who sits on the U.S. House Financial Services Committee, said in an interview.

Leadership ‘Failure’

“The FHA has a responsibility to manage their funds responsibly and keep their books in order, but their economic value has completely deteriorated in the last year,” Senator David Vitter, a Louisiana Republican on the Senate Banking committee, said today in an e-mailed statement. “This is an absolute failure of leadership by the current FHA management, and we must hold them accountable to taxpayers,” Vitter said.

Democrats defended the agency’s historic role enabling low- income families to purchase homes with low down payments.

“At a time when the private market constricted, FHA stepped up, providing crucial liquidity and access to the mortgage market,” Representative Maxine Waters of California, a Democrat on the Financial Service Committee, said in a statement.

Senate Banking Committee Chairman Tim Johnson, a South Dakota Democrat, said he was “deeply concerned” by the actuary’s findings and would call Secretary of Housing and Urban Development Shaun Donovan to testify at a hearing after the U.S. Thanksgiving holiday.

January Start

Most of the FHA’s new revenue-generating policies will go into effect in January. The annual premium FHA charges borrowers in return for guaranteeing loans will rise by 10 basis points on new mortgages, an average cost of about $13 per month for borrowers. The agency also will no longer allow some borrowers to stop paying premiums after 10 years.

FHA will provide deeper levels of payment relief for borrowers who receive loan modifications to avert foreclosure.

In addition, FHA will expand short sales and continue auctioning off at least 10,000 delinquent loans every quarter, urging investors who buy them to take steps to keep families in their homes.

FHA Acting Commissioner Carol Galante declined to speculate on whether these measures would be enough to keep the agency from seeking Treasury assistance.

“At this point in time, it’s literally impossible to say whether we will or won’t need a draw,” she said during a briefing for reporters in Washington. “We are doing this to increase the likelihood that we will not.”

More than 17 percent of all FHA loans were delinquent in September, according to data on the agency’s website. The agency has lost $70 billion on loans it insured from fiscal years 2007 through 2009.

Down Payments

The report blames the fund’s losses largely on loans in which sellers were allowed to cover the down payment on behalf of the buyer, often by inflating the price of the house and reducing equity for what may been an otherwise unqualified buyer. Congress banned the FHA from backing such loans beginning in 2009.

FHA currently backs 15 percent of U.S. mortgages issued for home purchases. The agency provides liquidity to the housing market by insuring lenders against losses on loans with down payments as low as 3.5 percent. Lenders are made whole if the mortgages default.

In the past two years, FHA has raised premiums and tightened credit standards in an effort to avoid seeking government aid. This year, it avoided taking a subsidy despite mounting losses because it received a one-time payment of almost $1 billion from a legal settlement over claims that mortgage servicers botched foreclosures.

FHA’s finances rebounded, at least temporarily, after it increased insurance premiums on new single-family home loans in April by 75 basis points to 1.75 percent of the loan amount.

For the agency’s 2012 report, its actuary changed the economic modeling to include less-optimistic home-price projections and a revised assessment of loans from earlier years that have been refinanced more recently.

To contact the reporters on this story: Clea Benson in Washington at cbenson20@bloomberg.net; Cheyenne Hopkins in Washington at chopkins19@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net

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