FHA Capital Reserve Ratio To Drop Below Federal Mandate

The Federal Housing Authority announced last week that its capital reserve ratio would drop below mandatory levels for the first time in its 75-year history.  The news comes just weeks after the Obama Administration launched a program to assist FHA borrowers that are behind on payments, a program that is set to only help a small percentage of those eligible.

Following its announcement, the FHA stated that it will not need government aid.  “To be clear, the fund’s reserves are sufficient to cover our future losses, so the FHA will not require taxpayer assistance or new Congressional action,” said FHA Commissioner David Stevens in a press release.

The capital reserve ratio mandated by Congress for the FHA is 2 percent and with the agency now insuring about a quarter of all new loans generated this year some concern exists that a bailout may be needed if delinquencies continue to rise.  Roughly 17 percent of the 5.3 million mortgages the FHA insures are behind by at least one payment.

With perceived risk increasing for the FHA, Commissioner Stevens also announced intentions to hire a Chief Risk Officer, a new position that has not existed in the agency’s 75-year history.  The move will help further crackdown on shady mortgage operators that try to push bad loans.

The FHA has been key component in recovery of the home loan market the past year as borrowers who attain FHA insurance are only required to make a down payment of 3.5 percent.  About 80 percent of new loans insured by the FHA have been for new homebuyers who might not have been able to purchase a home with larger down payment requirements.

“By keeping affordable loans flowing, particularly to the growing ranks of first-time homebuyers, the FHA has been critical to our nation’s economic and housing market recovery,” said U.S. Department of Housing and Urban Development Secretary Shaun Donovan.

 Additionally, the most recent loan modification program launched by lawmakers earlier this month has not made nearly the headway as hoped.  About 850,000 FHA loans that are behind on payments are eligible for modification, but the program is only set to assist 45,000 borrowers.

That result is doing little to relieve the pressure of rising foreclosures, which will continue to place a large burden on the FHA insure reserves.

Leave a Reply