I'm due to take a closer look at FHA myself. I looked into FHA's finances pretty closely a couple years ago and I remember some of what I learned back then. I took a brief look at the default figures and they have been pretty much flat over the past couple years. Given that, and based on what I know, I think that any sort of doomsday scenario is pretty unlikely, for a couple reasons:
1.) FHA had a low "market share" during the peak bubble years. Right up until Fannie and Freddie got bailed out, they dominated the market, and before the crash there was a private subprime market. As weak as FHA's lending standards were at the time, there was even easier mortgages available through other channels, and while FHA made a signifant number of horrible loans, its problems have not been nearly as severe as Fannie and Freddie or the private subprime market.
2.) When those other channels went away or had to tighten their lending stanards precipitously after the crash, after house prices had already experienced much of their declines, FHA volumes increased-- and therefore FHA has significant revenues coming in now, on loan vintages that are performing better than those in the past. If you have a lot of claims, it helps to have a lot of new premiums coming in.
3.) FHA has pricing power-- it can raise its fee, and in fact it has already done so fairly recently. For a lot of borrowers without a fat downpayment and solid platinum credit, a FHA mortgage might be about the only game in town. If claims are a little higher than anticipated, FHA could bump up its fee again, and that could cover a shortfall that would occur otherwise.
A comment about Mr. Edward Pinto's claims that if the FHA were a private mortgage insurer it would be shut down: that's really not necessarily true. It is only true that FHA's reserves are well below its statutory minimums, but I have just been reporting in recent weeks that Old Republic's mortgage insurance subsidiary's reserves fell below its statutory requirements but Old Republic was given waivers by its regulator after that to continue operating for well over a year. It was only when it became clear that the company was soon going to run out of cash that the regulator stepped in and forced the company to stop writing mortgage insurance. So just because a private mortgage insurer falls below their statutory reserve level does not mean that their regulator would shut them down.
And the fact is, FHA does still have cash reserves to pay claims, and as long as it does, it can operate with out a bailout, and could conceivably build its reserves back above the statutory minimum. Unlike the case of Old Republic's mortgage insurance unit, the FHA insurance fund's cash levels have been low but more or less steady over the past couple of years. It has already operated for well over two years with reserves below statutory minimums but has not required any bailout yet.
According to FHA's actuaries, if house prices drop significantly again this year, the fund may run out of cash and a "bailout" would then be needed to cover some claims. If house prices don't suffer any further significant declines, no bailout will be needed in all likelihood. With unemployment going down, I would think that it's getting less likely that house prices will fall much further, and therefore an FHA bailout scenario seems likely to be avoided. If there is a bailout, it is likely to be very small by recent standards.
Even if the FHA would eventually need a bailout, the fact is that without the FHA insuring mortgages for the past few years, we would be in much worse shape than we are in the housing market, becasue even fewer people would have been able to buy all these foreclosed houses that are coming on the market. I just recently blogged about how I'm fixing up a house to fix up and sell, and in all likelihood, when we sell the place it will be to an FHA buyer, because most of the sales in that neighborhood are FHA. In the country, about 50% of sales are FHA. A $10 or $20 billion bailout would really be a small price to pay for the role that FHA has played in stabilizing the market and ensuring some baseline level of demand the past few years.
Finally-- and you can take this with a grain of salt since I lean left politically-- I think that what you see from Congress on the FHA is fear-mongering in an election year. They want people to believe that disaster is just around the corner so that people will vote Obama and the Democrats out in November.
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