FHA Needs $943 Million

Fannie Mae may be turning a profit – more than $17 billion last year – but another government housing agency is likely going to request a taxpayer bailout before the end of the year. Many are placing the blame squarely on the Obama administration.

Huge Losses Expected

FHA is expecting a huge loss over the loans it insured in recent years. As a result of being forced (according to some) to cover those loans, this will be the first time ever it will require any kind of bailout. And critics are saying Obama is to blame. Republican Representative Jeb Hensarling, who is the chairman of the House Financial Services Committee, said in a statement,

Since 2009, administration officials have repeatedly assured Congress and the American people that FHA was healthy and on a sustainable financial footing…even the president’s own budget now confirms, prove otherwise.

As it stands, the White House says the FHA has close to $30 billion available right now, but because of bad loans, those cash reserves will likely be drained quickly. Its current Commissioner, Carole Galante, reports the agency could possibly avoid it, but that the “financial hole” that’s in the president’s 2014 budget proposal will likely play a big role on what it will ultimately have to do. It has a few months to do the math, but many are already saying it’s unavoidable.

But there’s another dynamic that while many financial analysts will dismiss, makes common sense. Two weeks ago, a new report was released and in it, massive profits were being reported by Fannie Mae. Remember – both Fannie Mae and Freddie Mac took taxpayer dollars in 2009 and it hasn’t repaid them. Instead of taking more taxpayer dollars, there’s a certain simplicity behind using part of that multi billion dollar profit to cover the shortcomings of FHA. Not only that, but Fannie Mae actually turned bigger profits than even the nation’s banks reported, including Wells Fargo and AIG.

FHA Making Progress

Meanwhile, Galante said today on a conference call with the media,

FHA, while still under stress from legacy loans, has made significant progress and is on a sound fiscal path forward.

That said, the agency is still uncertain as to how the financial dynamics will play out. An audit was conducted this past November and the possible deficit was discovered then. From there, the agency has worked to minimize the losses in hopes of lessening the impact. One of those efforts included raising the premiums borrowers will pay. That act alone, explained Galante, could bring in close to $18 billion in 2013 calendar year.

One of the responsibilities of the FHA is to always have the cash on hand to cover losses – both current and future. If it falls short of its projections, it must then turn to the American taxpayer. It’s one of the biggest funding sources for Americans who earn modest incomes and those who are considered first time home buyers. As it is, the FHA is backing more than $1 trillion in loans. Historically, it’s had more relaxed credit requirements, but even that will change.

The FHA was able to delay taking taxpayer funds last year due to legal settlements made with several of the nation’s banks. Now, though, it doesn’t appear that a solution will appear before the fall. If does opt for taxpayer funding, no one knows for sure how much it will total. The White House is projecting $1 billion. Again, this all begs the question: if Fannie Mae’s profits were $17 billion last year and it still owes taxpayers, why aren’t moves being made to cover than $1 billion with its profits? It’s not as though it’s two different sectors – both agencies are in place to ensure the mortgage sector grows and moves smoothly.

Reverse Mortgages

The biggest losses, explained Galante, will be due to reverse mortgages. These have been controversial since their inception. While they can often serve as a solution for homeowners in retirement, the long term repercussions can prove troublesome. It’s sold as a way for senior citizens tap into their equity but what no one anticipated, or at least factored into the equation, were the dropping values. It’s proven problematic around the country.


Meanwhile, those on both sides of the aisle and who serve on the Senate Banking Committee say they’re committed to finding solutions, including legislation that will improve the outlook. No one seems to be too concerned, though. That has some wondering if this won’t become another opportunity to procrastinate until it becomes a major crisis.

FHA has its fair share of critics, too. They say FHA needs to tighten its borrowing standards for any loans it insures and they also say shrinking market shares would be a wise move, too. Structural changes would further strengthen the agency and would prevent having to turn to other sources – including taxpayers.

But it has its supporters as well. There are as many, if not more, who support the Agency and say there are already safeguards in place that prevent borrowers who have spotty credit from garnering approval. They also insist FHA was the one that stepped up when all avenues of private capital had closed. In doing so, it played a role in keeping the housing market’s crash minimized.

And let’s not forget the critics of Obama in general. They too had plenty to say, including,

By attempting to be all things to all borrowers, the Obama administration has abandoned FHA’s historical mission, it has endangered the future operations of the agency, and it has put taxpayers at risk for another Washington bailout.

What are your thoughts? Do you think the monies that are now lining Fannie Mae coffers should be used to ensure FHA doesn’t require your tax dollars? How would you reply to political answers that say the logistics prevent the money from being moved? Also, with the president’s 2014 budget finally unveiled, do you think this bodes well for the American people or is too little, too late? Share your thoughts with us – it’s all of our tax dollars at stake.

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