Delinquent Loans Draining FHA’s Cash Reserves
November 20 2012
The Federal Housing Administration (FHA) is expected to report that losses on delinquent mortgages have drained its reserves and pushed the agency once again into a negative area that could require a cash injection from the U.S. Treasury for the first time in FHA’s 78-year history. That would mean that for the fourth consecutive year FHA’s cash reserves in its Mutual Mortgage Insurance Fund had fallen below the 2% capital ratio of total loans that Congress mandates the agency needs in order to repay claims on projected losses.
FHA guarantees about 15% of all US mortgages with outstanding balances and has been seminal during the housing recession in providing capital access for mortgages, specifically to first-time home buyers. FHA had projected last year that it would show a $9.4 billion positive value in 2012. And this year it has attempted to bolster its finances by increasing premiums and volume of loans. It also received a one-time payment of nearly $1 billion from mortgage services to settle foreclosure execution claims.
However, it is being reported that as many as 25% of the loans FHA guaranteed in 2007 and 2008 are “seriously delinquent,” compared to about 10% of its loans insured in 2010.Some say that is because the loans FHA insures are too risky. Borrowers with relatively low FICO scores (at around 660) have been able to secure a loan insured by FHA with down payments as low as 3.5%. The big question now is whether the Treasury will need to come to FHA’s rescue at a time when questions about the nation’s ongoing investment in housing continue to be raised. At the very least, HUD, which oversees FHA, finally might need to take a stronger stand on enforcing regulations that tighten the agency’s insurance standards and, as a consequence, limit mortgage availability.
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