In many ways, the FHA became the mortgage lender of last resort after the housing bubble burst in late 2006. The federal agency now insures more than 30% of all new mortgage purchase originations. The agency was originally intended to provide increased access to funding for mortgages after the Great Depression. However, the FHA’s expansion and changing role in the housing market now has the agency in dire financial straits, and could necessitate a bailout from the Treasury (it’s worth noting that this bailout would not have to be approved by Congress due to the FHA’s budget authority).
In today’s Wall Street Journal, Nick Timiraos reports that the FHA has nearly exhausted its reserve funds. The FHA insures more than $1 trillion in mortgages, and is required to have capital reserves equal to 2% of that figure. A recent audit shows that reserves now stand at $1.2 billion, or about 0.12% of guaranteed loans – significantly less than mandated by Congress. The losses largely stem from high delinquency levels on loans made between 2007-2009.
The FHA dipped below its mandated reserve levels a few years ago, and there was some discussion on increasing the minimum down payment on an FHA-insured mortgage from 3.5% to at least 5% to make up for the shortfall, although nothing has been seriously considered.
It seems likely that the FHA will receive whatever funds that it needs, so long as it is politically expedient. While there has been much talk about reducing government’s role in housing finance, nobody really knows how to go about achieving this goal because the government is now backing or insuring approximately 90% of new mortgages. With long-term borrowing rates as low as they are, it seems unlikely that we are going to see a stampede of private investors looking to fund mortgages right now.
The current system of government backing, flawed though it is, is the only thing that kept the housing market from breaking down entirely when the bubble burst. If government support of the housing market were to be withdrawn now, the impact could be disastrous. I anticipate that lawmakers will realize this and act accordingly, but then again, no one ever accused our elected officials of acting predominantly with the public’s best interests in mind.