FHA to Require $943M in First-Ever Bailout, Despite Fee Increase

FHA to Require $943M in First-Ever Bailout, Despite Fee IncreaseThe government mortgage insurer, the Federal Housing Administration, will generate $18 billion in fiscal year 2013 from a large volume of quality loans, including $3 billion from a new premium increase that went into effect April 1.
Nonetheless, the Obama Administration projects the FHA will need its first bailout ever in the amount of $943 million.
The FHA needs to replenish reserves at the end of fiscal year 2013 for future losses. A final decision likely would not be made until the fiscal year ends Sept. 30.
The FHA, which guarantees loans with as low as 3.5 percent down, has $1.1 trillion in insurance that’s currently in force on U.S. mortgages.
“The MMI (Mutual Mortgage Insurance) Fund currently has approximately $32 billion in cash available to pay claims, so this is not a cash problem; it is one of setting the right size of loan loss reserves aside,”  said Shaun Donovan, Secretary of U.S. Department of Housing and Urban Development (HUD), in written testimony for a House subcommittee Thursday.
The $943 million figure is based on an annual re-estimate of the reserves FHA will need to hold as of September 30, 2013 for the payment of expected losses over the next 30 years on its portfolio of guaranteed loans.
The FHA’s mortgage insurance business surged significantly during the Great Recession. The agency is supposed to fund itself from premiums it charges homeowners. It has never received taxpayer funds in its 79-year history.
FHA’s share of the mortgage market has gone from a low of 3.1 percent of loan originations in 2005, then up to a peak of 21.1 percent in 2010. More recently, its share has come down to 16.5 percent as of the 4th quarter of 2012.
Donovan explained that the number of FHA single-family loan endorsements has declined to levels comparable to those seen in fiscal years 2002 and 2003, when FHA’s market share was  lower than it is now.
This indicates that the “FHA’s current slightly elevated market share is primarily due to a substantial decrease in the size of the total mortgage market rather than exceptionally high
FHA loan volumes,” the HUD chief said.
Effective April 1, the FHA raised raise by 10 basis points, or 0.1 percent, the annual insurance premium paid by borrowers on new FHA loans. The increase is expected to add $13 per month for the average borrower and will strengthen FHA’s capital reserves without limiting access to credit for qualified borrowers.

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