Realty Check

FHA Claims It Won't Need Bailout

Foreclosed Home

As foreclosures continue to rise, there's been a lot of talk lately about how well-capitalized the FHA is to handle defaults on all the loans it backs. The FHA, which doesn't make loans itself, estimates it will insure over $400 billion in loans just this year.

FHA now backs around 23 percent of U.S. home loans, compared to the barely 3 percent slice it backed at the height of the housing boom.

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The percentage of FHA loans in delinquency has gone from 5.4 percent last year to almost 8 percent in the latest delinquency survey from the Mortgage Bankers Association.

Critics claim the FHA will not meet its capital requirements by the end of its fiscal year (Sept. 30).

Thanks to new legislation to help housing recover, the FHA now backs loans up to $729,750, while it used to back loans only up to $417,000.

Yes, borrowers pay an insurance premium for that backing, but is it enough?

The FHA's new commissioner, David Stevens, says yes:

“We will not comment directly on the FHA’s capital reserve ratio until we receive the annual actuarial study. However, contrary to certain misconceptions, the Congressionally-mandated capital reserve ratio, which the annual actuarial study calculates, measures EXCESS reserves above and beyond projected losses over the next 30 years. Even if that level falls below 2%, FHA continues to hold more than $30 billion in its reserves today, or more than 5% of its insurance in force. Given this reserve level, FHA will not need a congressional subsidy even if the congressional capital reserve ratio falls below 2%. Furthermore, FHA's full faith and credit insurance means that there is no risk to homeowners or bondholders independent of the congressional capital reserve requirement. New FHA loans being issued today are not only critical to our economic recovery, but in addition, FHA continues to make money for the taxpayer; in fact, we project FHA’s FY 2010 book of business will produce $1.4 billion for the U.S. Treasury.”

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