UPDATE 3-US FHA's losses to swamp capital, audit finds

Thu Nov 15, 2012 11:01pm EST

* Housing insurer facing $16.3 billion deficit

* Findings suggest likely need for taxpayer support

* Obama admin. plans news steps to shore up agency capital

* Audit likely to spark debate on government housing role

By Margaret Chadbourn

WASHINGTON, Nov 15 (Reuters) - The U.S. Federal Housing Administration is facing likely losses that will swamp its capital and fuel a $16.3 billion deficit, but the Obama administration plans to take steps to try to avoid the need for taxpayers to bail out the loan insurer.

An independent audit found a gauge of the agency's capital adequacy had dropped into negative territory, the Department of Housing and Urban Development said on Thursday.

The findings likely mean the agency, which insures about one-third of all U.S. mortgages, will need taxpayer funding for the first time in its 78-year history. They also appear certain to fuel a long-standing debate on the government's role in supporting the housing market.

The audit showed the FHA had exhausted the capital it would need to cover losses on the $1.1 trillion in loans it guarantees. It is legally required to maintain a 2 percent capital ratio, which is a gauge of its ability to withstand losses, but it has not met that target in almost four years.

The audit found that the ratio had dropped to negative 1.44 percent, representing a negative economic value of $16.3 billion, the department said.

"During this critical period in our nation's economic history, FHA has provided access to homeownership for millions of American families while helping bring the housing market back from the brink of collapse," HUD Secretary Shaun Donovan said in a statement.

An audit last year found the FHA, a primary source of funding for first-time home buyers and those with modest incomes, faced a nearly 50 percent chance of needing a bailout. Full details of the latest audit will be released on Friday.

The FHA has never needed an infusion of funds from the U.S. Treasury because it has been able to take other actions, including raising insurance premiums, to stay solvent.

Those premiums help cover the costs related to defaulted mortgages. It is possible the agency could raise them again to shore up its finances, but unlikely they would cover the full capital shortfall.

The agency said it "should add an additional $11 billion" to the mortgage insurance fund by the end of the 2013 fiscal year.

Earlier this year, the FHA managed to avoid a bailout because it received an almost $1 billion payment from a U.S. settlement with mortgage servicers on claims of lending abuses.

But critics of the agency have warned that taxpayers could soon be on the hook if losses continued to mount.

Republicans have worried the FHA could turn out to be a burden on taxpayers along the lines of Fannie Mae and Freddie Mac, the mortgage finance firms the government seized in 2008.

Those companies have soaked up almost $190 billion in taxpayer funds, although they are both now profitable, and sparked cries for the government to ratchet back its support for the housing sector.

"It's time for us to return to fundamentals in housing, recognizing that having the federal government making loans to people who can't pay them back isn't good for homeowners, communities, or the country," Senator Bob Corker, a Republican on the Senate Banking Committee, said in a statement.

Supporters of the FHA hail the role it has played keeping mortgage funds flowing since the housing bubble burst in 2006.

The agency does not make loans itself, but offers private lenders guarantees against homeowner default.

Its share of the home loan market has increased sharply since the housing bubble burst, with its loan portfolio more than tripling. In 2006, it only insured about 5 percent of U.S. mortgages.

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Comments (1)
JoeEifrid wrote:
“Republicans have worried the FHA could turn out to be a burden on taxpayers along the lines of Fannie Mae and Freddie Mac, the mortgage finance firms the government seized in 2008.

Those companies have soaked up almost $190 billion in taxpayer funds, although they are both now profitable.”

This article shows how absurd it was for the government to put Fannie and Freddie (FnF) into conservatorship. No bailout was ever needed. FnF had plenty of reserves to weather the storm. The treasury required FnF to borrow from the treasury through the issuance of senior preferred shares $1 billion dollars each just to be put into conservatorship. Then they required FnF to “borrow” more taxpayers dollars when ever their assets values dipped below their liabilities – or when they were technically insolvent. Several big companies are technically insolvent, like Delta Airlines and AutoZone. They pay their bills just fine, and FnF could have too until they got back to profitability. On top of having to get capital from the Treasury that they did not need, they were also required to pay the government a 10% dividend. This required FnF to get even more funds from the government as paying the dividend on occasions caused their assets to dip below their liabilities. FnF have paid over $50 billion in dividends for funds they could have got along without.

It gets better though. On August 17th the US government said FnF no longer has to pay the 10% dividend on roughly $190 billion. They now require FnF to hand over all of their profits starting in January. Looking at recent profits that would have the government earning nearly 20% in interest charges. Would one ever think that Uncle Sam would turn into a loan shark. The FnF shareholders have also never been given a plan to pay back the principle, not will they be able if the government confiscates ever dime they back.

FnF loan quality has always been better than the FHA’s. If the FHA is now just coming to a need to possibly tap the taxpayers, why wasn’t it expected that FnF couldn have done the same with their superior cash flow and lower delinquency rates. The shareholders are being robbed of their company. One can argue that the government should get out of the mortgage business, but the government should still respect the private individual ownership of Fannie and Freddie and allow the shareholders the ability to remove themselves from conservatorship. Conservatorship is to protect value, not to steal it.

Nov 15, 2012 8:36pm EST  --  Report as abuse
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