Among the crowd of government agencies that have rushed to aid the economy, the Federal Housing Administration often gets overlooked. And yet, along with Freddie Mac and Fannie Mae, the FHA has played a huge role in preventing a complete housing collapse. All together, those three currently buy or guarantee more than 90 percent of mortgages.
But the FHA is facing mounting losses and, The Wall Street Journal reports, it may soon be forced to notify Congress that its reserves have slipped below the mandated level. What will happen at that point, nobody seems to know. An unidentified senior government housing official tells the Journal that there's "no risk" that the FHA would ask Congress for a bailout, an assurance not shared by outside analysts.
The FHA dates to the New Deal, when it was created to back loans made to working-class borrowers. Since the FHA only guarantees traditional loans and requires strict underwriting, its share of the market dwindled to around 2 percent earlier in the decade as subprime lenders filled its niche. But its share has skyrocketed in the past couple of years as the subprime market disappeared. It was 23 percent in the second quarter of 2009, according to Inside Mortgage Finance.
There are concerns about the quality of many FHA loans, however. FHA borrowers can put down as little as 3.5 percent when buying a home. And FHA borrowers were allowed to get loans without putting any money down at all because of a "down payment assistance program" that allowed charities to supply the down payments. Home sellers used the program to move properties by reimbursing charities for the "gift." Predictably, these loans have performed poorly -- even, according to one analysis, worse than subprime loans. The program was stopped last year, but its legacy remains. "While that program accounts for around 11% of the FHA's loan book, it has generated 22% all loans that are seriously delinquent or in foreclosure," the Journal reports.
An additional concern is that unscrupulous subprime lenders and brokers have been drawn to FHA loans as the only game in town. And the inspector general who oversees the FHA says the agency does not have the staff to oversee such a boom in its lenders, leading to possible undetected fraud.
As for what might happen if the FHA reveals that its reserves have dwindled below the mandated level, we'll just have to wait and see. The agency will release its reserve level after its fiscal year ends on Sept. 30.