The Obama administration’s current push to encourage banks to grant high-risk housing loans to lower-class borrowers insured by taxpayer-funded programs provided by the Federal Housing Administration (FHA) may be complicated by the fact that the FHA is in severe debt and faces a potentially disastrous future, records reveal.
The Obama administration, which reportedly believes that the housing recovery is “leaving too many people behind,” hopes to encourage lenders to use “more subjective judgment” in offering loans to people with low credit scores and to people who “owe more than their properties are worth” in order to allow them to refinance at current interest rates.
Though many analysts believe that these kinds of policies were responsible for the 2008 financial collapse, the FHA is reportedly working with the White House to develop “new policies” to encourage lenders to offer high-risk loans that conform to FHA programs, which are designed specifically to provide housing loans to low-income Americans. The Obama administration is assuring banks that if these high-risk loans default, then only government agencies like the FHA will face the financial consequences.
The FHA hopes that government-sponsored lending giants Fannie Mae and Freddie Mac, which helped cause the financial crisis by lending to low-income borrowers in the late 1990s and throughout the Bush administration in order to meet federal quotas, will soon follow its lead.
But the FHA’s ability to handle this new risk is questionable. The agency is in severe debt and currently faces a bleak economic future that might require Treasury funding to keep it afloat, records reveal.
The FHA’s 2012 audit found that the agency has a negative economic value of $34 billion, leading some to predict the inevitability of a taxpayer bailout.
The U.S. Department of Housing and Urban Development (HUD) issued a November 2012 report finding that the FHA’s Mutual Mortgage Insurance Fund’s capital reserve ratio “fell below zero to negative 1.44 percent.” The HUD report noted, “While this one-time valuation of the economic net worth of FHA’s portfolio is obviously of concern, it does not mean that FHA will have to draw from the Treasury.”
But FHA commissioner Carol Galante admitted in February 2013 testimony before the House Financial Services Committee that if FHA was required to draw money from the Treasury, the money would be used to help the agency’s reserve fund. Though Galante maintained optimism about her agency in her testimony, House Financial Services chairman Jeb Hensarling excoriated her over the FHA’s finances.
“Commissioner Gallante, as bad as the picture appears … I fear that the true finances could be potentially even worse,” Hensarling said, quoting experts who said that FHA has a net worth of negative $26 billion and a total capital shortfall of $47 billion, and that the FHA’s insurance program is “materially underfunded” and that the amount of capital infusion required to save the agency would be in the $50 billion to $100 billion range.
Hensarling also pointed to a chart showing the capital in the FHA’s mutual mortgage fund for the past several years going “straight down,” in Hensarling’s words, while the Obama administration’s projections for that same time period showed capital going up.
“Not only has FHA been wrong, it’s been wrong for four years in a row,” Hensarling said. “After four years of being wrong, why is this testimony different?”
Galante previously served as president and chief executive of BRIDGE Housing Corporation, described as “the largest non-profit developer of affordable, mixed-income and mixed-use developments in California” with a “mission to create affordable homes and apartments.” She also served in a leadership role for the Housing Partnership Network, a business collaborative of nonprofits that aims to “build and finance affordable homes, revitalize communities and provide economic opportunity that improves the lives of millions of lower income and working families.”
Despite the FHA’s dismal financial outlook, HUD’s report claimed that the FHA at least enjoyed success in lending to minority borrowers.
“FHA continues to lead the market in support of minority homeownership. While FHA insurance was used for approximately 27 percent of all home purchase mortgages in 2011, FHA accounted for 50 percent of home purchase mortgages for African-American borrowers and 49 percent for Hispanic/Latino borrowers,” according to the HUD report.
