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FHA Requires $1.7 Billion

Mandatory appropriation disclosed by federal housing commissioner

Sept. 27, 2013

By Mortgage Daily staff

A $1.7 billion mandatory appropriation is required for the Federal Housing Administration thanks to losses from loans made at the height of the financial crisis and the government's reverse mortgage program. While the head of FHA sees improvement ahead, others warn of further deterioration.

Federal Housing Commissioner Carol J. Galante sent a letter Friday to Sen. Tim Johnson (D-S.D.), chairman of the Senate Committee on Banking, Housing and Urban Affairs, and Sen. Mike Crapo (R-Idaho), ranking member of the committee.

Galante advised the senators that in order to comply with the Federal Credit Reform Act of 1990, FHA will need to take a mandatory appropriation of around $1.7 billion on Sept. 30.

She explained that the appropriation is more than what was outlined in President Obama's budget because of slowing FHA endorsement volume during the past few months.

At least one congressman was not happy with the deviation from the president's budget.

"From testimony and reports to our committee, we knew the FHA was beyond broke," Rep. Randy Neugebauer (R-Texas) said in a written statement. "Now we know it's even beyond its own estimation of bailout broke.

"I'm shocked to find out now that the FHA will require nearly double the amount they projected."

Neugebauer, who authored the Protecting American Taxpayers and Homeowners Act -- legislation designed to improve FHA's finances -- said that the administration is losing credibility on this issue.

Galante noted in her letter that the slowdown in FHA originations is consistent with the broader mortgage market -- which has seen originations decline as interest rates have risen.

"It is also consistent with FHA's goal of reducing its footprint in the market," her letter stated.

The Mutual Mortgage Insurance Fund was hurt by the increased role played by FHA during the financial crisis, Galante said. The fund's capital reserve ratio fell below the statutory 2 percent threshold beginning in 2009 mostly as a result of losses from 2007 through 2009 vintage FHA loans and losses from home-equity conversion mortgages.

She explained that the appropriation is an accounting transfer and doesn't reflect the current view of the MMIF's performance or its long-term fiscal health and current cash position.

"That is because the calculation used to determine whether a mandatory appropriation is required is based on assumptions about loan performance and recoveries made in December 2012 and does not incorporate recent performance improvements or current economic factors," Galante said.

Long-standing accounting procedures mean that the estimate won't be updated until the next budget cycle is completed during the next few months.

She highlighted how FHA's portfolio has seen a 15 percent drop in delinquency rates since December, while early payment defaults have plummeted 91 percent and foreclosure starts have fallen 20 percent.

In addition, recovery rates on defaulted assets have improved 26 percent -- something Galante valued at $5 billion and said would far exceed the mandatory appropriation.

"The required mandatory appropriation does not mean that FHA is in need of cash to pay claims," the letter said.

FHA reportedly has more than $30 billion in liquid assets on hand and generated an additional $17 billion in fiscal-year 2013, according to Galante.

She said that updated data and economic forecasts during the next few months are expected to confirm that the health of the MMI fund is greatly improved.

But her assessment is not shared by the American Enterprise Institute, an FHA watchdog that says the agency uses future net earnings to count towards current capital -- something that no other financial institution is permitted to do.

"The FHA's estimated net worth at Aug. 31, 2013, under private generally accepted accounting principles (GAAP) was estimated at -$26.68 billion, up from -$30.41 billion in September 2012 and down from -$20.87 billion in September 2011," AEI Resident Fellow Edward Pinto wrote in a newsletter Friday. "The FHA's capital shortfall stands at $47 billion (using a 2 percent capital ratio) and $67 billion (using a 4 percent capital ratio applicable to the private sector)."

Pinto warned that FHA's financial position could deteriorate further given that it is calling on mortgagees to "once again originate high risk FHA loans to borrowers with as low as a 580 FICO score."

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