The U.S. Federal Housing Administration, facing a $16.3-billion (U.S.) deficit, will increase mortgage fees next year and take other steps in an effort to avoid a taxpayer bailout, the Obama administration said on Friday.
The agency, a primary source of funding for first-time home buyers and those with modest incomes, said it would raise the premiums it charges on loans it guarantees by 10 basis points, adding, on average, about $13 per month to a borrower’s cost.
A basis point is one-hundredth of a percentage point.
Housing officials would not say whether the steps would be enough to keep the agency from turning to the U.S. Treasury Department for a cash infusion. “I’m not going to place bets,” FHA acting commissioner Carol Galante told reporters.
An independent audit delivered to Congress on Friday showed the FHA had depleted the capital it would need to cover expected losses on the $1.1-trillion in mortgages it backs. It said the losses would leave the agency $16.3-billion in the red.
The FHA’s troubles stem from rising defaults on mortgages it guaranteed from 2007 to 2009 as the housing bubble was deflating. As private capital dried up during the bust, the FHA’s role grew. It now insures about 1.2 million loans, or about 15 per cent of all U.S. home loans, up from 5 per cent in 2006.
Ms. Galante emphasized that the White House’s annual budget proposal in February would be instrumental in determining whether the agency would need taxpayer funds by the time its fiscal year expires on Sept. 30. Any final determination would not be made until September.
While officials stressed that a bailout is not a foregone conclusion, critics of the agency – including some lawmakers – are concerned it could turn out to be a burden on taxpayers along the lines of mortgage finance companies Fannie Mae and Freddie Mac, which have been propped up by more than $135-billion in funds from the U.S. Treasury.
Senate Banking Committee chairman Tim Johnson said he was “deeply concerned” by the state of the FHA’s finances and urged officials to “do everything in their power to protect taxpayers and restore its capital reserve” to the level required by law.
The FHA is mandated to maintain a 2-per-cent capital ratio, which is a gauge of its ability to withstand losses, but it has not met that target in four years. The audit found the ratio had dropped to negative 1.44 per cent.
The loan insurer, which provides liquidity in the mortgage market by protecting lenders against defaults, said it would use new loss-mitigation tools to shore up its cash in its effort to stay solvent.
It also said it will increase the use of short sales on the loans it guarantees and offer investors pools of defaulted mortgages, committing to sell at least 10,000 distressed loans per quarter over the next year.
In addition, officials said the loan insurer would seek new authority from Congress to give it more flexibility in managing its loan programs to minimize losses.
The agency said these news steps, coupled with an expected $11-billion in new business by the end of 2013, will reduce the likelihood it will need to tap taxpayer aid next September.
Officials said the FHA’s capital ratio should move back into positive territory in 2014, but that it would not reach the mandated 2-per-cent target until 2017.