We learned this past week that the Federal Housing Administration may need you to pull harder. The FHA will issue its annual report this week, but, a soon to be released study by Joseph Gyourko, a real estate and finance professor at the Wharton School, suggests that the FHA will incur about $50 billion in losses over the next several years.
The FHA, which is funded through the mortgage insurance premiums it collects, doesn’t make loans but instead insures lenders against defaults. At the end of August, it guaranteed 7.2 million mortgages worth $1 trillion, a record sum. It held nearly $31.7 billion in reserve at the end of June, of which all but $2.8 billion was set aside to cover anticipated losses.
Curiously, if the FHA’s reserves fall to zero,
…the agency has what is known as an indefinite budget authority to draw funds from the Treasury Department without a congressional appropriation.
In an attempt to “stop the bleeding”, the FHA now requires a 10% down payment if a borrower’s credit rating is below 580. Prior to that change, one with a credit rating of 580 or less needed only to provide a down payment of 3.5%.
This part of the article is interesting. Remember that $8000 tax credit to first time home buyers that was supposed to turn the housing market around three years ago? Not only hasn’t it worked to turn the market around,
Mr. Gyourko says the [FHA] is underestimating by billions of dollars the future losses related to borrowers who used [the $8000 credit] to fund their down payment. [emphasis supplied]
Meanwhile, Fannie Mae is expected to need an additional $7.8 billion of your tax dollars to cover third quarter losses. That will get us to $94 billion…and still counting.
At least we are now beginning to understand that providing all Americans with the “right” to home ownership has a cost. The question is, when will the politicians figure this out?