The Federal Housing Administration reported that it has taken a massive loss on loans tied to seller-funded downpayment assistance and warned these loans could put the agency out of business.
The agency booked an additional $4.6 billion in unanticipated long-term losses, FHA Commissioner Brian Montgomery said at the National Press Club today, according to a transcript of his prepared statement released by the U.S. Department of Housing and Urban Development.
Montgomery said this was primarily due to seller-funded loans, which account for one-third of loans in the agency's portfolio.
He warned that legislation to modernize FHA must address the risk associated with downpayment assistance paid for by the seller or any other party that stands to financially benefit from the transaction. He noted his concerns are shared by the Internal Revenue Service, the General Accounting Office and HUD's Inspector General.
"Data clearly demonstrates that FHA loans made to borrowers relying on seller-funded downpayment assistance go to foreclosure at three times the rate of loans made to borrowers who make their own downpayments," Montgomery stated. "Unless we take action to mitigate these losses, FHA will soon either have to shut down or rely on appropriations to operate."
He said FHA is about to reopen public comment on a rule addressing seller-paid downpayment assistance. The rule will be submitted to the Federal Register today.
He said the agency has prevented 300,000 foreclosures on FHA-insured loans during the past four years and that nearly 500,000 FHASecure loans are expected to be endorsed this year.
Since September 2007, FHA volume was $76.1 billion, including $30.3 billion from FHASecure. Currently, there are 4.8 million FHA-insured loans.
He noted the temporary increase in FHA loan limits from the economic stimulus package is expected to boost FHA volume by 100,000 by the end of this year and called for a more permanent solution for high-priced markets. He also called for preservation of risk-based premiums that were recently implemented.
Montgomery warned that while some are calling for FHA to pick up all the potentially delinquent 2 million subprime loans, the agency is not designed to become the federal lender of last resort or a mega-agency to subsidize bad loans.