June 30, 2022

Will The FHA Need A Bailout? Congress Approves “FHA Emergency Solvency Act” As Loan Defaults Soar

Loan defaults at the FHA continue to soar according to the latest FHA Single-Family Outlook report issued by the FHA.

The latest statistics on the FHA loan portfolio show that almost 18% of all FHA insured mortgages are 30 days past due or more.  The number of loans classified as seriously delinquent increased by 19% from last year.

According to the FHA, a seriously delinquent loan is either in foreclosure, bankruptcy or 90 days past due or more.  Almost all loans that reach classification as seriously delinquent are never brought current and wind up as foreclosures.  Nationally, the number of foreclosure inventories remain at record high levels and FHA defaults are greatly contributing to this situation.

Attempting to prevent a collapse and taxpayer bailout of the FHA, a House Financial Services committee approved the FHA Emergency Solvency Act”.  The Act would attempt to keep the FHA solvent by requiring better internal accounting controls and disclosures by the FHA, establishing minimum mortgage insurance premiums, terminating FHA lending privileges of unscrupulous lenders and requiring that FHA lenders who commit mortgage fraud be required to reimburse the FHA for losses.

The House Financial Services subcommittee noted that “The FHA’s cash reserves are down to dangerous levels and taxpayers cannot afford another Fannie or Freddie style bailout”.  The Emergency Act will give new powers to the secretary of HUD to reduce risky lending policies before the FHA faces collapse.

The FHA insurance reserve fund which covers losses on mortgage loans has been almost completely wiped out.  Although the law requires the FHA to maintain a capital ratio of 2%, the fund currently has a ratio of only 0.12%.

Critics of the FHA have long argued that the standards for FHA loan approval are too lax.  Besides allowing a borrower to purchase a home with only a 3.5% downpayment, the FHA guidelines allow borrowers with very high debt ratios to be approved.  (See FHA First Time Homeowner Asks “How Much Home Can I Afford” for more on this topic).

The housing collapse has no doubt contributed to the number of defaults at the FHA but allowing unqualified borrowers to purchase homes that they cannot afford does not help anyone in the long run.  It is time to review the FHA’s mission and underwriting guidelines to ensure that the future operations of the FHA remain sound.