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Federal Housing Administration Running Out of Money
September 18th, 2009
The Federal Housing Administration (FHA) reported that its cash reserves will fall below
mandated levels for the first time. Officials however insist that the agency is
not in need of a bail-out.
The government agency which
is responsible for funding first time home buyers faces a cash constraint for
the first time with growing concerns that it may need a tax payer bailout.
According to the Mortgage Bankers
Association, as of July 2009, 17% of FHA loans were at least one payment
behind or in foreclosure compared with 13% of all
The Federal Housing
Administration is required by federal law to maintain a 2 percent cash reserve
of insurance liabilities. With rising defaults on FHA loans, the agency may
experience a dip below its required 2 percent cushion.
Federal Housing Administration’s commissioner, David Stevens, said that the
agency will not require any tax payer money for help. The agency does not
provide any loans but offer insurance against default. Many FHA loan borrowers
are willing to pay for the insurance because the FHA loan only requires a down
payment of 3.5% of the purchase price.
The cause of the financial
deterioration is due to the FHA underwriting record numbers of high-risk
mortgages.
Currently, FHA insures about
5.3 million mortgages worth about $750 billion. 3 years ago, it was insuring 4
million mortgages. Between 2006 and by the end of 2010, FHA’s insurance
exposure would have increased to $1 trillion from $410 billion. U.S tax payers
are guaranteeing the repayment of 80% of all U.S home mortgages funneled
through FHA, The Veterans Administration, Fannie Mae and Freddie Mac.
1 in 4 new mortgages carry a
FHA guarantee, a significant increase of 1 in 50 from 2006. The Federal Housing
Agency is raising its requirements for its mortgage firm participants and
proposing them to maintain a reserve of $1 million above from the current
requirement of $250,000. The agency is also proposing each participant to go
through periodic annual audits.
A few months ago, the FHA
banned mortgage firm Taylor, Bean &
Whitaker from providing any more federal insured loans as it failed to
provide a required financial report. There’s suspicion that the firm was
involved in fraudulent activity.
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