The Federal Housing Administration (FHA), which guarantees a good chunk of the mortgages written each year, is in serious trouble.
Washington Post: The Federal Housing Administration has been hit so hard by the mortgage crisis that for the first time, the agency’s cash reserves will drop below the minimum level set by Congress, FHA officials said.
The FHA guaranteed about a quarter of all U.S. home loans made this year, and the reserves are meant as a financial cushion to ensure that the agency can cover unexpected losses.
“It’s very serious,” FHA Commissioner David H. Stevens said in an interview. “There’s nothing more serious that we’re addressing right now, outside the housing crisis in general, than this issue.”
The issue of the FHA’s financial health was raised earlier this month when the Wall Street Journal warned that the organisation was veering towards insolvency. The FHA then responded, basically saying that they’re not going broke and that they wouldn’t need a bailout, a la Fannie and Freddie.
Commissioner Stevens sounds a tad optomistic here. He calls the agency’s problems really serious, but he still thinks that their problems can be solved sans outside help. How does he foresee that happening? Well, cracking down on fraud for one thing, insuring that banks who process fraudulent loans share in the losses — that all sounds good, but it’s not obvious that that’s at the crux of the matter.
He also says the new numbers — which will come out officially on October 1st — represent the situation at the depth of the crisis — and is not taking into account new revenue/premiums that will come in. In otherwords, Stevens thinks that the FHA can “earn its way out” of the situation, which is, to be fair, the solution that was applied to other banks whose capital ratios were on the verge of violating legal limits.
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