Bloomberg News

FHA Insurance Fund May Need Fannie-like Bailout, Hensarling Says

December 06, 2011

Dec. 1 (Bloomberg) -- The Federal Housing Administration, which backs about a third of U.S. home loans, could require billions of dollars in taxpayer aid if the housing market continues to deteriorate, a Republican lawmaker said.

The agency, which provides liquidity by protecting lenders against borrower defaults, could follow in the footsteps of Fannie Mae and Freddie Mac, the mortgage companies that were taken into government conservatorship in 2008, Representative Jeb Hensarling said at a House hearing today.

“FHA is a disaster in the making and if we don’t do something it may become the next Fannie and Freddie,” said Hensarling, the fourth-ranking House Republican. “If the FHA was a private financial institution, likely someone would be fired or fined and the institution would find itself in receivership.”

Hensarling made his remarks during a hearing by the House Financial Services Committee, where lawmakers questioned Obama Administration officials about a report that showed the FHA’s insurance fund could run out of money if home prices continue to fall.

Housing and Urban Development Secretary Shaun Donovan acknowledged risks facing the FHA, which is a part of his agency.

“We have significant concerns about the level of the fund,” Donovan told the committee. He also said the agency’s condition “is remarkably resilient in the wake of the extraordinary turmoil in the housing market.”

Chance of Failure

Last month, House and Senate lawmakers increased the maximum size of FHA-insured loans to $729,750 from $625,500, a move opposed by Hensarling and other Republican leaders. For the first time in history, loan limits are higher at FHA than at Fannie Mae and Freddie Mac, Donovan said, which could cause more homebuyers to seek FHA loans. The limits “need to come down,” he told the committee.

The FHA’s insurance fund is fed from premiums paid by borrowers. Last month, an independent actuarial analysis concluded that the net worth of the fund stood a 50 percent chance of falling to zero or near zero, which could force it to seek taxpayer support for the first time.

The agency’s capital ratio, a measure of the FHA’s Mutual Mortgage Insurance fund’s ability to withstand losses, fell to 0.24 percent from 0.50 percent a year earlier and 3 percent in 2008. The FHA has failed to meet the legal minimum 2 percent ratio for three straight years.

For the year ended Sept. 30, the fund held $33.7 billion, up $400 million from a year earlier.

Growing Share

The FHA has increased its share of the mortgage market in the wake of the 2008 credit crisis as private funding for mortgages has dried up. To boost reserves, it raised its insurance premiums to their highest ever and improved the quality of its loans by holding borrowers and lenders to higher standards.

If the mortgage fund can’t cover losses on loans, a 1990 law gives the agency “permanent and indefinite” funding from the Treasury to cover outstanding loan guarantees, Donovan said.

Fannie Mae and Freddie Mac, the companies that own or guarantee more than half of U.S. home loans, have drawn more than $170 billion from a U.S. Treasury Department lifeline since they were seized by regulators in September 2008.

--Editors: Lawrence Roberts, Gregory Mott

To contact the reporter on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net.

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net.


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