The Federal Housing Administration (FHA), part of the Department of Housing and Urban Development (HUD), maintains reserves at a minimum of 2% on the total loans it insures. To bolster the housing market by replacing conventional mortgage financing and supporting prices, the FHA guaranteed over $400 billion in loans in 2008. 2009 will see considerably more. As the price of individual homes continues to decline (as is expected until 2011) defaults and foreclosures will increase.

As a result of recent price declines, the FHA’s reserves dropped from 6.5% in 2007 to 3% at the end of 2008. When reserves do drop below 2%, the FHA itself might need a congressional bailout to remain an effective player in supplying mortgage loans. FHA loans made up 37% of loans in California in 2009.

first tuesday take: Congress has no choice but to continue supporting the FHA as the insurer of what has become nearly half of all homeowner mortgages presently being originated in California. As the FHA runs low on cash, Congress has options:

  • infuse capital, using taxpayer money;
  • increase the mortgage insurance premium (MIP) charged by FHA to insure a loan from its present .6% — just slightly more than private mortgage insurance (PMI) on 10% down payment deals; or
  • increase loan qualifications standards for borrowers and property.

The quick fix, and the most economically feasible, is to reset the MIP to replenish the reserve that the FHA needs to cover defaults and foreclosures. Thus homebuyers using minimum down FHA-insured loans would pay the price of homeowner defaults. It would be a tricky step for congress to bail out FHA with funds from the treasury, since doing so would put their feet into the politically deep water of even greater tax rates, a necessary future event to cover the increased deficit.

For MLS agents, not much will change with FHA-insured financing, except some increased standards such as a larger down payment and higher monthly payments. Not bad, if prices stop dropping, jobs stop being lost, builders don’t build, and lenders cram down loans (and that’s the good checklist).

Re: “Loan losses spark concern over FHA”, from The Wall Street Journal