The government's mortgage insurer is coming dangerously close to holding no excess cash reserves for loan losses.
An annual independent actuarial report puts the FHA's loan loss reserves at .24% of its $1.1 trillion dollars in insured mortgages.
The FHA, which does not originate loans, but insures them, has gone from less than 5 percent market share at the height of the housing boom to now more than 30 percent. The auditor measures the FHA's reserve by estimating future losses, and those estimates continue to grow as home prices fall and mortgage delinquencies still run very high.
The FHA's estimated reserves stand at $2.6 billion as of September 30th, according to the report, down 45 percent from $4.7 billion last year. Congress mandates that the FHA's reserves must be at least 2 percent of its total insurance in force, but it hasn't been at that level for a few years now. Auditors estimate it will not be back above that level until 2014, and that would be based on the current book of business.
"The credit quality of fha borrowers in 2011 is setting a new record with an average credit score of over 700 for the first time ever," said FHA acting director Carol Galante on a call with reporters.
Still, if home prices continue to fall, the FHA could need government support in the form of a bailout.
The report uses as base-case scenario from Moody's Analytics, indicating a home price decline in 2011 of 5.6 percent and a small growth in prices in 2012 of 1.3 percent.
Other analysts have predicted a price drop in 2012, or at the very least a flattening with no growth. Still the independent auditors say "projections suggest that any further, nationwide price declines in 2012 would need to rival those of 2011 before this first level of support would be insufficient."
The FHA, however, may be looking at growing risk, as lawmakers this week vote on reinstating higher loan limits just for FHA and not for Fannie Mae and Freddie Mac. The limits fell in 600 counties on October 1st.
"This is situation that has never occurred before, so it's very hard for us to make any kind of prediction around how much of that business will end up coming to FHA versus finding other private alternatives," Galante said. "We can deploy premium increases if the economic situation is worse than it is today," she added.