The Federal Housing Administration (FHA) has discrepancies in its loan portfolio that are unlikely to be resolved anytime soon and will continue to pose a burden to the recovery of the housing market.
With little more than $32 billion in reserves, the FHA has an estimated $70 billion in future payouts just from loans that originated between 2007 and 2009. Overall, about 686,000 seriously delinquent loans—amounting to $106 billion—are currently being guaranteed by the FHA.
The activity of the FHA has exploded in the past several years. In 2006, the FHA insured half a million loans with a combined value of $70 billion. Four years later, the FHA expanded to insure 1.7 million mortgages totaling about $319 billion. Since 2009, the FHA has continually failed to meet its minimum capital ratio of 2 percent.
In 2012, the Government Accountability Office found that “under one stress scenario in which house prices decline by 13.7 percent in 2011 and house prices decline another 1.3 percent in 2012, [the FHA] may require $13 billion in assistance from Treasury to ensure the financing account had sufficient loss reserves.”
The FHA’s unhealthy state recently came to light when it asked the U.S. Treasury for $1.7 billion of taxpayers’ money to make up for troubled loans. Treasury is legally required to meet the obligations of the FHA when insurance funds are depleted.
The FHA has taken steps to discourage the holders of the loans from filing insurance claims in the event of actual loan defaults. By cracking down on “falsely certified” mortgages that claim to have met all FHA requirements, the Department of Housing and Urban Development has managed to make four banks pay about $1.5 billion in penalties.
Four of the biggest banks in the U.S. currently hold about $57 billion of loans that are distressed. While these banks state that these loans are FHA insured, it is still unclear if they will file insurance claims if these loans default, because of the fear of FHA “crackdowns.” Wells Fargo, for example, holds $19 billion of these distressed mortgages and has announced that its mortgages have been issued in compliance with FHA rules. It has not indicated whether it will file an FHA claim.
In any case, the $57 billion in total distressed mortgages complicates current policy within the FHA and could have an impact on the housing market as a whole.
Congress needs to take immediate steps to address the serious problems in the FHA. We have outlined some potential reforms here.
Filip Jolevski is currently a member of the Young Leaders Program at The Heritage Foundation. For more information on interning at Heritage, please click here.