The Federal Housing Administration (FHA) has a 50% chance of requiring a taxpayer bailout next year; whether it will happen and its magnitude depends on the direction of home prices. Decreasing home values, a growing number of defaults and insufficient mortgage insurance premium (MIP) fees continue to plague the FHA’s ability to cover its losses on loans; an uncanny reflection of pre-bailout Fannie Mae.

The FHA has the existing authority to take taxpayer money directly from the U.S. Treasury without seeking approval from the White House or Congress. Although the agency has never required taxpayer assistance, current FHA capital reserves have dropped to .24% of projected losses, with cash reserves totaling just $2.6 billion. The legal minimum reserve requirement is 2% of projected losses; the FHA has not hit held this minimum since 2008.

The report continues to predict that the nation’s housing prices will drop 5.6% in 2011, then rebound in 2012 with 1.3% growth nationally. If this is the case, the FHA reserve fund will return to its mandated 2% level by 2014, and a taxpayer bailout will not be required. Global events may yet interfere with FHA recovery.

first tuesday take: No surprise. The FHA’s exceedingly low underwriting standards and low MIP coverage fees indicate a taxpayer bailout is imminent.

Although the American Dream of homeownership appears more attainable for the non-saving population with as little as 3.5% down, such low underwriting standards only feed the American Dream bubble that blows up in everyone’s face at the end of each business cycle. Now that the government is learning about mortgage financing with another imminent bailout, it is time for the powers-that-be to get out of mortgage financing guarantees and stop pushing homeownership as ideal. The FHA must begin promoting sustainability by requiring borrowers to have more skin in the game — a mortgage lending fundamental historically proven to work. [For more information regarding further regulation needed to eliminate mortgage defaults, read March 2011 first tuesday article, Whose skin is in the game?]

Even with a taxpayer bailout just around the corner, the Occupy Wall Street (OWS) movement need not march on the FHA (and into its vacant real estate owned (REO) properties) just yet. [For more information on OWS’s intentions to occupy REOs, see the December 2011 first tuesday article, OWS occupies foreclosures.]

Due to the earned income tax credit (EITC), the lower-income 40% of households in America pay no federal income taxes and thus do not contribute to the taxpayers’ Treasury. With the top 60% of households funding the FHA bailout via the Treasury, there is plenty of money to go around.

However, perhaps the FHA bailout should come with some conditions. We’re thinking of restricting FHA-insurance availability to first-time homebuyers, requiring a 5% minimum down payment and a bit more down for MIP coverage on larger loans (for that 60% of taxpayers who actually pay taxes). Unless Congress tightens up its FHA insurance and takes steps to protect its bottom line, it will remain an unsustainable operation since home prices will not rise, if at all, beyond the rate of consumer inflation for years. [For more information on loan requirements, see October 2011 first tuesday article, The 20% solution: personal savings rates and homeownership.]

 

Re: “Federal Housing Administration could require bailout, audit finds” from Los Angeles Times