Loan Modification

No FHA Bailout

By Peter G. Miller

I was surprised to find out that the FHA has benefited from the Wall Street bailout. That’s the claim of some who say that the cost to taxpayers will be merely $89 billion rather than $250 billion.

“What the $89 billion included,” reports the New York Times, “were costs associated with stabilizing Fannie Mae and Freddie Mac, the mortgage finance giants; loan guarantees by the Federal Housing Administration; and liquidity programs offered by the Federal Reserve, such as those authorizing the purchase of mortgage-backed securities from financial institutions. It also included the Troubled Asset Relief Program ? which, nameless Treasury officials contended, may someday generate a profit.” (See: This Bailout Is a Bargain? Think Again, April 19, 2010)

This is nonsense. There has been no government bailout of the FHA mortgage program. Not a dime in taxpayer money has gone to the FHA. Notice that the claim stems from unnamed sources. If I said something that absurd I wouldn’t want my name associated with it, either.

The FHA loan plan is an insurance program. Borrowers put down less money to buy a house and in exchange pay insurance premiums. The insurance is used to compensate lenders if a borrower is foreclosed.

FHA Financing

HUD says in fiscal 2009 that the “FHA?s capital resources have grown from $27.2 billion at the start of the year, to $30.7 billion at year?s end. That represents an overall capital-resource ratio against
outstanding loan guarantees of 4.5 percent. The increase in capital resources is primarily due to
premium revenues collected on new insurance in FY 2009. FHA collects a significant share of total premium revenues at the time of insurance endorsement, and FY 2009 yielded a record volume of new insurance commitments.”

Now let’s think about this: In fiscal 2009 — last year — about the worst year in real estate that anyone can recall — the FHA insurance fund INCREASED. Why then would the FHA mortgage program need taxpayer assistance? It makes no sense.

A Comparison

The Times surely understands this. The very same article which discusses alleged TARP costs also says “there are the losses suffered by the Federal Deposit Insurance Corporation when it has to take over faltering institutions. The estimated cost to its insurance fund is $6.65 billion for the 43 banks that have failed this year. The fund is financed by bank fees.”

Again, no TARP money has been used to fund the FDIC.

The point, of course, is that if the Times can mention that FDIC is self-funded then why not say the same about the FHA? FHA loan requirements could not be more clear — if you borrow with financing insured by the FHA then your premium dollars are going into a reserve fund. That reserve fund has unquestionably taken a hit because of general weakness in the real estate marketplace, but that fund is also well-capitalized.

Full post as published by FHA Mortgage Guide on April 21, 2010 (boomark / email).