President Obama has announced that he ordered the Federal Housing Administration (FHA) to cut in half the fee paid by homeowners whose mortgages the agency guarantees.
The good news is that this reduction will save those homeowners who are able to refinance their homes about $1,000 annually. The Administration says that the reduced payments will help about 3 million homeowners refinance their homes.
The bad news is that this fee cut would also make a taxpayer bailout of FHA more likely. The agency’s latest annual report shows that it has about $2.6 billion in capital to pay for possible losses in its $1.1 trillion mortgage portfolio. This equals about $1 for every $400 of insured mortgages—far below the legally required $1 of capital for every $50 of insured mortgages.
The report notes that in the past year alone, the agency saw its capital drop by $2.1 billion, and there is a 50 percent likelihood that the agency will need as much as a $43 billion bailout as soon as next year.
Since it was created in 1934, the FHA has focused on assisting moderate- and low-income home buyers by providing them with insured mortgages and allowing them to make down payments as low as 3.5 percent of the purchase price. However, since other forms of housing finance dried up since 2007, the FHA has moved from insuring about 5 percent of new mortgages to about one-third of all new mortgages.
Although the agency’s leadership confidently predicts that a recovering housing market will keep it from needing a taxpayer bailout, other experts make a convincing case that the agency is already underestimating the amount of risk in its portfolio, making a bailout all but certain. Today’s action to reduce the agency’s income guarantees the need for tax dollars to recapitalize the agency.
This new announcement differs from yet another housing plan that was contained in the annual State of the Union message. That proposal would have also substantially damaged the FHA’s finances. This is yet another of many attempts by the Obama Administration to assist “underwater” homeowners to refinance their mortgages. All of the previous efforts have helped far fewer people than promised, and this one is likely to be no different.
Like past efforts, this version applies only to certain homeowners. In this case, the fee reduction will apply to refinanced FHA-insured loans that were first made on or before May 31, 2009. For those borrowers, the fee reduction will reduce their mortgage payments, but it is very unlikely to substantially increase the number who can refinance. As with past plans, far fewer homeowners than the Administration predicts will either qualify for refinancing or be able to find a lender willing to make the new loan.
The President also announced that servicemen and women whose houses had been wrongly foreclosed after 2006 will receive about $115,000 in compensation plus any home equity they might have. It appears that over 4,500 active-duty military personnel had their homes foreclosed, despite the Servicemembers Civil Relief Act, which is supposed to protect them while they are on active duty.
In addition, servicemen and women who were improperly refused a refinancing to a lower interest rate or had to sell their home at a loss when reassigned will receive some level of compensation. In all such cases, the money that they will receive will be paid as part of a recent agreement between federal and state government officials and major mortgage servicers. While the agreement was announced last month, final documentation has still not been released, and details such as this compensation plan are only being gradually released.