The Federal Housing Administration (FHA) is the oldest government backed lender in the U.S. It began as part of the New Deal in 1934. Its earliest mission was to provide loans to those denied by traditional financial institutions, but were still deemed "credit worthy." The goal of the FHA was to create better neighborhoods, living conditions and boost the economy by helping more Americans become homeowners.
During the housing bust that began in 2008 and 2009, the FHA picked up many pieces of the aftermath by offering loans to those who were facing foreclosure with their private lenders an option to refinance. With a White House plan called Making Home Affordable (MHA), the FHA offered substantially low interest rates, with minimum down-payments and even allowed first-time homebuyers to use the $8,000 tax rebate as their down-payment. Statistically, those who borrow with down-payment assistance have a higher rate of loan default, and the default rate currently faced by the FHA is up 76% from just a year ago.
While the rebate and MHA program was an economic lifesaver for many homeowners, it has, according to recent reports from the New York Times nearly bankrupted the FHA.
The FHA insures 5.4 million mortgages worth nearly $675 billion, it grants nearly 6,000 loans a day. Of those, 411,000 are in default. The most recent loans are in default at much higher rates than the older loans. Many FHA loans are being given on homes that are not equal to the value of the loan. In other words, they are "underwater" at the time of sale.
Even the Inspector General of Housing and Urban Development, Kenneth Donohue, who oversees the FHA, said the lack of reserves with which the FHA was operating as a "flashing red light;" urging the agency to take the situation more seriously.
Homeowners in Peril
Without the FHA, many potential homeowners will have nowhere else to turn. With credit histories being heavily scrutinized and banks now beginning to require 20% down payments, there are fewer Americans that will be able to afford homes.
Even current homeowners who have lost their jobs and are seeking refinancing won't be able to go through private lenders, as their loan standards would today eliminate them from obtaining a refinance loan.
For many who have fallen on difficult times, others who need relief from their current payments, young families venturing into home ownership for the first time and numerous other American's will be closed out of the housing market or will face eviction if the FHA goes bankrupt.
In hard hit economic areas, FHA loans are the only ones real estate agents are seeing, and the only reason homes are selling in those areas. Without them, there would virtually be no real estate market.
If the current economic situation continues to decline and the unemployment rate continues to rise, there will likely be additional foreclosures. Even if the FHA does avoid bankruptcy, it might have to reevaluate its loan standards. This could mean higher down-payments, more stringent credit standards and fewer dollars for those eligible to borrow. Either way, many potential homeowners and buyers will be eliminated from the housing market.
Taxpayers Paying the Tab
Of course, the ones who will be feeling the crunch the most are the taxpayers. The FHA is a government funded entity, and as such it is completely funded by U.S. taxpayers. Its loans are guaranteed through the Government National Mortgage Association (Ginnie Mae). Being part of Ginnie Mae means that if the FHA does goes broke, taxpayers are responsible for paying those investors that own Ginnie Mae bonds.
If the current market drops, if thousands of FHA borrowers continue to default and if standards for loan applicants aren't raised, it is the taxpayers who will bear the burden, probably with increased taxes.
The FHA has what is known as, "permanent and indefinite" budget authority. This means that Congress does not have to authorize a request for funds for the agency – they have the authority to bypass Congress for any additional funding, leaving the taxpayers with few options to object to another bailout.
The Bottom Line
The FHA has enabled many Americans to become homeowners that would otherwise never have been provided loans by private institutions. The agency has taken a few steps to help bolster its finances – decreasing the limit of backed loans from $729,750 to $625,500, and has tightened some loan standards.
The FHA also claims it is still operating in the black, bringing in more revenue than it expends. While this may be true, reports indicate that it is teetering on a financial precipice that with the current economy could send them easily into the bankrupt category.
For homebuyers, the only advice would be to save as much as possible, even if that means putting off purchasing a home for a year or two. Loans from private banks and institutions are already requiring an increased down-payment, and if the economy doesn't rebound soon, the FHA will be obligated to follow suit.
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