The sustainability and financial condition of the Federal Housing Administration (FHA) is not as bad as initially thought. Days before President Barack Obama issued a spending proposal to keep the FHA alive, analysts at Bloomberg and the Wall Street Journal speculated that the improving median home prices in the United States are helping to reduce the troubled agency’s mortgage investment portfolio. The analysts were right in this regard, but the White House’s assessment of the FHA also revealed plenty to be concerned about.
Another Major Bailout?
The massive FHA shortfall estimated by an independent actuary team back in November 2012 turned out to be considerably less than $16.3 billion. There is no question that the FHA would require a bailout; the plan submitted by the White House calls for $943 million in taxpayer subsidies to keep the FHA alive.
The FHA is hardly idle with regard to its shortfall. The agency is increasing fees and tightening its mortgage underwriting guidelines. Mortgage lenders in the U.S. are certainly not happy with this situation, but FHA Commissioner Carol Galante believes that this move could bring in $18 billion in 2013.
Should the FHA be in a position to take the proposed aid package from the Treasury, it would mark the first time in history that this agency has resorted to a bailout in order to stay afloat. Although many lawmakers are not pleased with the prospect of yet another bailout for a government agency that guarantees home loans, the survival of the agency is considered crucial.
A Magnet for First-Time Home Buyers
The FHA might be in a loss mitigation mode at this time, but various analysts believe that first-time home buyers could be the most affected by a slowdown of the agency’s operations. Even if the FHA gets bailed out and continues to tighten its underwriting criteria, first-time home buyers would still flock to the FHA when they fail to qualify in today’s super-strict mortgage lending environment.
The FHA, however, may face competition from retail mortgage lenders should it accept bailout funds. According to a recent report published by the Los Angeles Times, the new FHA fees and guidelines are raising the agency to the level of private mortgage insurers. Since FHA mortgages require considerable processing and underwriting, some borrowers may opt for private mortgage insurance (PMI) rather than applying for FHA loans.