Interest Rates Might Save the FHA from Financial Collapse

by 26 Apr 2013

The fate of the Federal Housing Administration (FHA) has become a politically-charged issue in Capitol Hill. Since 2008, the FHA has taken on a significant amount of risk as the lender of last resort in the United States. If not for Fannie Mae, Freddie Mac and the FHA, the American housing market would have suffered an even more damaging collapse since it is unlikely that the private sector could have provided the financial guarantees that the government-sponsored mortgage investors have extended to borrowers over the last few years. 

The FHA's expanded role in providing home loan guarantees since 2008 has managed to load the agency's portfolio with substantial amounts of risk. When an independent audit of the FHA revealed the possibility of a major shortfall that could put the FHA in the red by $16.3 billion if the housing market deteriorated, various politicians and pundits sounded the alarm and correctly guessed that the FHA might be in need of a bailout from the U.S. Treasury to stay afloat; that was in 2012.

The housing market did not deteriorate, and thus the predicted shortfall has lessened considerably. This does not mean that the FHA is in the clear; in fact, the White House recently presented a budget that included a little less than $1 million for the troubled agency to borrow in 2013 should the need arise. FHA Commissioner Carol Galante has explained that she believes that the agency's fee increase and new rigorous underwriting might end up covering the projected shortfall and preventing the FHA from running to the Treasury for bailout funds.

Enter the FHA Assumable Loan Program

Strict underwriting and higher fees are not the only factors that can lift the FHA from its rut. According to Jason Gold of U.S. News and World Report, the assumable feature of FHA loans might end up being the agency's long-term savior. This means that first-time home buyers who are having a hard time qualifying for a mortgage due to the current lending climate can apply to move in to a home that is financed by the FHA.

The process of assuming an FHA mortgage is far less complex than buying a home with FHA financing. The new homeowners will become FHA borrowers who must pay the new mortgage interest rates. The Federal Reserve Bank expects to keep mortgage interest rates artificially low through 2013, but many economists think that rates will increase after that time. A healthy portfolio of FHA assumable loans might lift the agency out of the red and provide a reasonable alternative for first-time home buyers to participate in the housing market.



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