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FHA Reserves Hit Bottom, but Rebound Expected

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Despite the fact that the Federal Housing Administration’s cash reserves have fallen below the amount required by Congress, acting FHA Commissioner Carol Galante told reporters on Tuesday that “while the FHA is facing the most severe economic conditions,” the agency’s “Mutual Mortgage Insurance fund capital balance remains in positive territory and its programs are actuarially sound.”

Rep. Spencer BachusThe FHA’s cash reserve status was reported Tuesday in the agency’s annual report to Congress. On the same day, the Senate Banking Committee held a hearing on oversight of the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, while the House Financial Services Committee was marking up a bill introduced by its chairman, Rep. Spencer Bachus (left), R-Ala., that would suspend the current compensation packages for the senior executives of Fannie and Freddie and instead put these executives on the federal government pay scale.

A spokesman for Housing and Urban Development (HUD) told AdvisorOne that at the end of fiscal year 2011, the FHA MMI Fund’s total capital reserves stood at $33.7 billion, $400 million more than one year ago.

However, the fund’s capital reserve account holds a balance of $4.7 billion, or, stated another way, has a capital reserve ratio of under 0.3%; Congress requires that the capital reserve ratio be at least 2%. The drop in the capital reserve ratio over the past couple years, which is the first drop for FHA, “is attributed to increased insurance claims prompted by the current housing conditions, and certainly that includes the drop in home values, which limits the amount we can recover from the resale of these homes,” the spokesman said.

Sen. Tim. JohnsonSen. Tim Johnson, D-S.D. (left), chairman of the Senate Banking Committee, said during his opening remarks at the FHFA hearing that Fannie Mae and Freddie Mac together “backstop approximately $5 trillion in mortgages and help support the nearly $11 trillion U.S. mortgage market.” Unfortunately, he continued, “that market is now supported by $170 billion in assistance from the taxpayers.”

While the mortgage market “would be even worse-off than it is today” if Fannie and Freddie had not been placed into conservatorship during the Bush administration, Johnson said, “we need to find ways to end the need for future support without destabilizing the housing market further.”

Said Johnson: “Finding a path out of conservatorship is a task for both the FHFA and this Committee.”

Rep. Scott Garrett, R-N.J., chairman of the House Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, said that in light of the “bleak” report about the FHA MMI Fund’s capital reserves ratio being “down 45% from last year,” which could increase the chances of a taxpayer bailout next year, this “is what happens when the federal government meddles in economic affairs best left to the private market.”

Said Garrett: “Because the federal government has played an outsized role in our country’s housing system, the American taxpayers are now at risk of another costly bailout that will put future generations even deeper into debt.” Today’s report, he said, “shows that FHA is overleveraged at a shockingly high rate of 400 to 1, making Lehman Brothers and Bear Stearns, the poster children of the 2008 financial collapse, look like financially solvent institutions.”

Because of the “bleak outlook” for the FHA, Garrett continued, “it makes no sense to increase the size of the loans the FHA can insure. With the potential for tens of billions of dollars in taxpayer losses, it is unconscionable to be even considering raising the conforming loan limit so that the American taxpayers can insure the mortgages for million dollar homes.”


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