When President Obama sends his 2014 budget request to Congress later this month, housing analysts and fiscal hawks will pay special attention to a single line item reserved for the Federal Housing Administration.
Each year the president’s budget office independently assesses the financial status of the FHA’s mortgage insurance fund. If the fund does not have enough cash to cover all expected insurance claims over the next 30 years — based on reasonable expectations for the housing market and broader economy—the agency requests a draw from the U.S. Treasury to fill the projected gap.
If the FHA’s sobering financial audit released in November is any indication, there’s a decent chance that the president’s budget will include such a request. That audit — which is separate from the president’s budget review — projects the agency will require an additional $16.3 billion to cover all expected claims through 2042, beyond the $30.4 billion now in the agency’s coffers. Even if the agency stopped receiving revenue, it would still have enough cash on hand to settle insurance claims for the next seven to 10 years, according to auditors.
There’s no way to know how large the president’s request will be or even whether a Treasury draw will be necessary. There is, however, reason to be optimistic that FHA’s financial status has improved since the November audit.
Since then, the FHA has announced plans to increase annual insurance premiums on new loans, extend the term for which borrowers pay those premiums, reform its costly reverse mortgage program, ramp up loss-mitigation efforts and implement several other policy changes to help shore up the insurance fund. The agency is also expected to bring in $11 billion in revenues from new loans by the end of the fiscal year, which will further bolster its capital reserves, according to auditors.
In addition, the housing market has improved well beyond auditors’ expectations in recent months, meaning better recoveries on defaulted loans and perhaps fewer insurance claims than previously thought.
To be clear, not every aspect of the FHA’s business has been rosier than expected. Mortgage interest rates have remained historically low in recent months — and they’re expected to stay there, according the Federal Reserve. But auditors initially assumed that rates would gradually rise in fiscal 2013. This could mean lower-than-expected revenue in the coming years as more FHA-backed borrowers decide to refinance into non-FHA loans.
Again, there’s no way to know for sure how things have changed between November and today. But regardless of the number in that budget line item —$0, $10 billion, even $20 billion — one thing is certain. Taxpayers will be getting a bargain.
Without the agency’s help in recent years, it would have been much more difficult for middle-class families to access mortgage credit since the housing crisis began. According to Moody’s Analytics, the agency’s actions in 2011 alone prevented home construction from plummeting 60% from already depressed levels and home prices from dropping an additional 25%. This would have sent our economy into a double-dip recession, costing 3 million jobs and half a trillion dollars in economic output.
Of course, that countercyclical support comes at a cost, and taxpayers should stand ready to help the FHA as it continues to weather the worst foreclosure crisis since the Great Depression. At the same time, the agency must prove that it is doing everything in its power to help struggling homeowners and communities get back on their feet, which may require further policy changes.
For example, it’s well known that the FHA has lagged its private-sector counterparts on foreclosure prevention and loss mitigation. According the Office of the Comptroller of the Currency, 43% of government-guaranteed mortgages — the vast majority of which are FHA-insured loans — modified in 2011 re-defaulted within a year of their modification, compared to just 17% for Fannie Mae and Freddie Mac and 14% for loans held in bank portfolios.
One key reason for this poor performance is a lack of accountability among servicers for foreclosure prevention activities. We urge the FHA to clamp down on servicer misbehavior. Specifically, the agency can withhold insurance claims when servicers delay processing a borrower’s request for a modification or fail to submit proof of a proper review. The FHA can also create an unbiased process for appealing loss-mitigation decisions and impose meaningful penalties on servicers that disregard loss-mitigation guidelines.
If the president’s budget indeed predicts that the FHA will need taxpayer support for the first time in its 78-year history, it will surely be fodder for the agency’s harshest critics to push drastic and unnecessary reforms. But more sensible observers will keep the FHA’s current financial troubles in perspective, instead looking to smart changes that maximize the return on any taxpayer investment in the agency.
