Reuters and the Wall Street Journal are both reporting that the Department of
Housing and Urban Development (HUD) and its Federal Housing Administration
(FHA) will be seeking Treasury fund to shore up the FHA's Mutual Mortgage
Insurance Fund. Both Reuters and The Journal quoted unnamed sources for
is reporting that the cash needed may be as much as $1 billion while Reuters
says no decision about an amount has been made but quotes HUD Secretary Shaun
Donovan's statement in April that there would be a $943 million shortfall by
the end of this month. FHA has an authorized
line of credit with Treasury but if it does request a draw it would be for the
first time in its 80 year history.
FHA is required by Congress to maintain a
2 percent cash reserve in the MMI, but credit related expenses, largely related
to loans guaranteed by the agency over the several years prior to the housing
meltdown, depleted that fund and it has been operating below its mandated reserve
level for several years. An independent
actuarial report late last year found the fund operating at a deficit of $16.3
FHA Commissioner Carol Galante,
testifying about the audit before the House Financial Services Committee in
February said the deficit identified by the actuaries was against an active
portfolio of $1.13 trillion. She
estimated the economic value of the forward portfolio at negative $13.5
billion, the HECM portfolio at negative $2.8 billion or capital reserve ratios
of negative 1.28 percent and negative 3.58 percent respectively. At the time of the assessment the actuary
projected that the funds capital reserve ratio will be positive by FY 2014 and
reach 2.0 percent during FY 2017 assuming no changes in policy or other actions
At a press conference accompanying
release of the FY2014 budget In April Donovan declined to speculate about a Treasury draw but said that much
progress had been made in plugging the hole identified by the auditor. He said
that if comparisons were made "apples to apples" the fund was actually in
negative territory by more like $19 billion but in the few months since the
report FHA had made changes which had narrowed that gap to $943 million. The changes included ramped up modifications
and increased loan sales to increase recoveries from the 2007 and earlier loans,
suspending the bulk draw payment option of the reverse mortgage program, and substantially
increasing premiums for both FHA and GNMA loans. FHA has also tightened
enforcement of underwriting rules, and suspended or revoked lending authority
of a number of companies. Donovan said no decision would be made on the
need for a Treasury draw until October 1.
Current news reports are apparently relying on the April statement in
drawing their conclusions about the size of any draw.
The White House, HUD, and FHA have to
this point declined comment however critics of FHA have not been so
reticent. Senator Bob Corker (R-TN), a
member of the Senate Banking Committee and co-author of the Corker-Warner bill
to reform the housing finance system said,
"No reasonable person could believe that we should continue along with the
current housing finance system in this country when three separate entities -
Fannie, Freddie, and, according to reports, now the FHA - have all had to come
to the taxpayer for billions of dollars in bailout funds."
House Financial Services Committee
Chairman Jeb Hensarling (R-TX) is sponsor of the so-called "PATH" legislation which
was favorably voted out of the Committee in July. He issued the following statement in response
to the news reports.
"Hardworking American taxpayers are sick and tired of having
to bail out Washington's failed housing policies, whether it's the nearly $200
billion bailout of Fannie Mae and Freddie Mac or a bailout of the FHA.
Reports that the FHA will require its own billion dollar bailout reinforce the
need for the PATH Act, our proposal to create a sustainable housing finance
system. The PATH Act not only ends the bailout of Fannie and Freddie, it
includes reforms that will help ensure the FHA is solvent. Over the
years, the FHA has strayed far from its original mission. It has become
the nation's largest subprime lender. It's time to return the FHA to its
traditional mission of helping first-time homebuyers and those with low and
moderate incomes, and that's exactly what the PATH Act does."
PATH co-sponsor Randy Neugebauer (R-TX) and Senate
Banking Committee member David Vitter (R-LA) also issued statements following
the Journal and Reuter reports.