Despite diminished reserves, FHA Commissioner David H. Stevens insists the Federal Housing Administration does not need financial support from the federal government. As a federal agency charged with supporting the housing market in the government’s effort to recover from the current housing crisis, FHA is taking it upon themselves to prevent itself from falling victim to the housing crisis itself.
On Friday, FHA announced that their reserves are expected to be reduced to a level below a legally mandated minimum. However, according to Stevens, “There will be no taxpayer bailout.” Stevens announced a series of changes in policy that will ultimately reduce the risk of additional losses and strengthen the reserve fund in question. Because the agency is completely funded through fees paid by homeowners who have FHA-backed mortgage loans, the reserve fund has taken a direct hit as a result of the continued rise in foreclosure activity.
Even though unemployment statistics remain high, and continue to increase in many states, FHA is continuing to insure mortgage loans as conventional mortgage lenders continue to tighten their lending guidelines. Many lawmakers agree that if FHA does not tighten their guidelines, they will become “a powder keg that will explode,” according to Sen. Kit Bond (R-MO). Bond is calling for changes across-the-board so a potential bailout does not fall on the taxpayers again. Bond added, “It’s critical we address FHA’s problems now because they taxpayer credit card is maxed out and a viable FHA is necessary for our economic and housing recovery.”
Created during the Great Depression to help stimulate the economy by helping average Americans buy new homes, FHA has become the largest mortgage insurer in the world. Because of it’s minimal down payment requirement of only 3.5%, FHA insures approximately 23% of all mortgage loans in America today, compared to about only 2% just three short years ago. “Without FHA, there would be no housing recovery,” said Stevens.
By law, FHA is required to raise the level of reserves. However, because of market volatility, projecting future reserves is extremely difficult. Because the market has not bottomed out yet this year, as has been predicted, it’s a major factor in explaining why the reserve has been reduced in the first place.
The good news for those looking to purchase a home or refinance with an FHA-backed mortgage loan, FHA has no plans to increase their mortgage insurance premiums. Rather, they intend on reducing their risk to future losses by requiring FHA-approved lenders to possess at least $1 million in cash or other assets, which is up from the current $250,000 minimum.
In addition, FHA will appoint the agency’s first chief risk officer, who will be charged with capping refinances at 125% of a current home’s LTV (loan-to-value) and end the process of certifying mortgage brokers to issue mortgage-backed loans. Because mortgage insurance premiums will not be increased, borrowers of FHA-backed mortgage loans will not face higher monthly mortgage payments and can still benefit from the near historic low current mortgage rates.