FHA to Become Next Government Bailout?

The Federal Housing Administration (FHA) is coming under fire for the shaky state of its finances and the chance that it may need government money to keep it afloat in the next year.

The FHA, which now guarantees about a third of all new mortgages in the U.S., is required by law to hold 2 percent of its capital as reserves to protect the company against losses from soured loans. The housing crash took a heavy toll on those reserves and the FHA now only has 0.24 percent in reserves, down even from 0.50 percent last year. This marks the third year the company has been below the 2 percent threshold.

“We have significant concerns about the level of the fund,” said Housing and Urban Development Secretary Donovan before the House Financial Services Committee on Thursday, as quoted in a Bloomberg article. He was still upbeat though, saying the agency’s condition “is remarkably resilient in the wake of the extraordinary turmoil in the housing market.”

He added,

“While we all have been through the second-worst housing downturn in the history of the country, FHA, unlike many other institutions, retains a positive fund balance and the current book of business is strong… We need to take further steps to protect the taxpayer and we will continue to do that.”

Donovan was being called out to answer for his agency after an independent audit found that the FHA’s reserve fund was so low that it stood a “close to 50 percent” chance of failing and requiring a taxpayer bailout, as have Fannie Mae and Freddie Mac.

There are plenty of lawmakers who are unconvinced by Donovan’s claims that the FHA will weather the coming year just fine.

“FHA is likely a disaster in the making,” said Rep. Jeb Hensarling (R., Texas) as quoted in a Wall Street Journal post . “If we’re not careful, it may even become Fannie and Freddie, the sequel.” He added, “If the FHA was a private financial institution, likely someone would be fired or fined and the institution would find itself in receivership.”

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