Back In the Black: FHA’s Return to Solvency

The Federal housing Administration is a government agency within the Department of Housing and Urban Development. “It sets standards for construction and underwriting and insures loans made by banks and other private lenders for home building.”[i] In its efforts to stabilize the mortgage market since its collapse between 2007 and 2012, its volume in that market rose to roughly a third of all loan originations. Eventually, as a result of the void left by the recession, its insurance fund was valued at a whopping negative $16.3 billion in 2012. This resulted in the need for cash from the U.S. Treasury to cover the gap, which devalues the American dollar.

Early this morning, Julian Castro, present HUD Secretary whose speech writer is an obvious Dr. Seuss fan, said that the fund is “back in the black, and it’s on a strong track.” While the mortgage sector’s general agreement is that today’s hot button issue is limited availability of credit as a result of risky lending,  Castro says that HUD is “confident that the fundamentals of the fund are strong.”

Now that the fund is out of the red, what does this mean for the continued efforts of FHA? Castro said this morning that “It means that the FHA can fulfil its traditional role of providing access to credit.” With a $1.1 trillion portfolio, meeting the requirement to keep enough cash on hand to cover all projected losses is a significant challenge, as is its need to maintain 2% of its value, which it should have on hand by 2016.

The main question everyone seems to be asking now is whether it will expand its availability to more borrowers by slashing its prices on loan guarantees, which have increased 1.35% since 2011. One of the main proponents of expanding access to these loans by cutting their cost has been the Mortgage Bankers Association, headed by David H. Stevens, a frequent visitor to Capitol Hill who periodically testifies on the mortgage market to Congress.

Regardless of when FHA decides to cut costs to borrowers, the fact remains that FHA is on tract to recuperate its losses. Last year’s actuarial report indicated that the insurance fund fell short by $1.3 billion, which is significantly down from the giant figures of the recession: $-16.3 billion in 2012.

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