The U.S. Government Accountability Office (GAO) maintains a list of government agencies and programs that are considered to be high risk because they are an easy target for fraud, waste, abuse, and mismanagement.
The list is updated biannually, and the 2013 results are reported in the GAO’s 2013 High-Risk Series, released and published on the GAO website on Feb. 14.
The GAO included the Federal Housing Administration (FHA) in its list of high-risk agencies this year, explaining, “Recent events suggest that the 2-percent capital requirement [for FHA] may not be adequate to avoid the need for Treasury support [from taxpayers’ funds] under severe stress scenarios.”
The economic distress experienced between 2007 and 2009, with the associated housing finance crisis, resulted in private sector lending drying up, thus requiring greater involvement by the FHA. Between 2007 and 2012, the FHA housing portfolio increased by more than $800 billion, from $300 billion in 2007 to over $1.1 trillion by the end of 2012.
The FHA can no longer maintain a capital reserve ratio of 2 percent, given the defaults of housing mortgages. The GAO recommends that the FHA provide solutions. One scenario calls for the FHA to develop a program that allows it to survive without having to be rescued with taxpayers’ funds.
“One such action would be to determine the economic conditions that FHA’s primary insurance fund would be expected to withstand without drawing on the Treasury,” the GAO report advises.
Addressing FHA Risk
“We know the FHA is broke and is quickly approaching bailout-broke,” said Rep. Jeb Hensarling, chairman of the Committee on Financial Services, in a Feb. 14 announcement on the committee’s website.
The GAO report provided fodder for Hensarling, whose committee has already held two hearings in February. His committee will continue to hold hearings concerning the FHA throughout the year in the hope of developing a “sustainable mortgage finance system.”
During the Feb. 6 hearing, Hensarling stated that the FHA manages 56 percent of the entire mortgage insurance market. The FHA should be a last resort in the housing market, but because of very small down payment requirements, it has eliminated its competition. The FHA portfolio has grown into a mammoth, as besides underbidding competitors, it also supports houses with a value of up to $729,000.
“It is an open question whether FHA has now morphed into Countrywide. Arguably, the FHA has now become the nation’s largest subprime lender—all with the blessing of the Administration,” Hensarling said.
Countrywide Financial Corp., a former mortgage banking firm established in 1969, had at its height over 60,000 employees and assets valued at $200 billion. The company was acquired by Bank of America (BofA) in 2008, after Countrywide had fallen on hard times. BofA had to face the Securities and Exchange Commission and the Justice Department because of wrongdoing by Countrywide.
Hensarling suggested that because the FHA is a government agency instead of a private sector enterprise, it has a lot of leeway concerning its activities. In a private sector firm, if those responsible for the financial wealth of the company had gone the same path as the FHA, they would have been fired a long time ago.
“Historically, FHA has represented roughly 10% of the mortgage insurance market. … Today, however, FHA has strayed far from its original mission and legislative purpose,” Hensarling said.
FHA’s Financial State
“This fiscal year, the Mutual Mortgage Insurance Fund (MMI Fund or Fund) capital reserve ratio fell below zero to negative 1.44 percent,” according to the Nov. 16, 2012, FHA Annual Report to Congress (actuarial report) concerning the FHA Mutual Mortgage Insurance Fund.
The report stated that although the financial condition of the government-run mortgage insurer is of significant concern, it has not reached the point where it needs a bailout from taxpayer funds.
According to the FHA report, at the end of fiscal year 2012, the MMI Fund capital reserve ratio had decreased to negative 1.44 percent. The fund requires $46.7 billion, but only holds capital in the amount of $30.4 billion. Thus, the fund is short by $16.3 billion, but it holds enough money to insure loans for another 30 years.
A November 2012 article published on the Center for American Progress website points out that despite the report’s negative tone, the FHA is not in immediate need of a taxpayer bailout nor may it need such a bailout in the future.
What is of importance is that without the FHA, the housing market would have been far worse off. By insuring mortgages for middle-class consumers, the FHA made it easier to be granted mortgage credit.
“According to Moody’s Analytics, the agency’s actions prevented home construction from plummeting 60 percent from already depressed levels and home prices from dropping an additional 25 percent. This would have sent our economy into a double-dip recession, costing 3 million jobs and half a trillion dollars in economic output,” the Center for American Progress article states.
The FHA problems stem from the agency’s seller-funded down payment assistance, which gave rise to fraudulent activities, including inflating the purchase price. That program was shelved for any FHA loan credit approvals after Oct. 1, 2008, according to the FHA Mortgage Whistle Blower website.
“If the agency had never allowed seller-financed loans in its insurance programs it could have avoided more than $15 billion in losses,” according the Center for American Progress article.
On the plus side, the agency has done rather well in recent years, as more than two-thirds of its insured loans had down payments that were smaller than 5 percent of the loan. These latest loans are much more cost effective as the administration increased the premiums to be paid for using the program.
The Center for American Progress article ends with a positive comment: “It’s actually quite remarkable that the agency made it this far without support. ... The agency has actually outperformed its counterparts in the private sector.”
FHA Provides Its Perspective
“Much of the progress that we are seeing in the housing sector has been possible because of the FHA … and without which the crisis would have been much deeper,” testified Carol Galante, assistant secretary for Housing and Federal Housing Administration, before the House Financial Services Committee on Feb. 13.
Galante states that the agency’s problems stem from insured loans that were granted between 2007 and 2009, amounting to $70 billion in claim applications. On the other hand, loans insured since 2010 are more profitable than any loan portfolio during the existence of the FHA.
In a review of the FHA, an independent actuary predicted that earnings between 2010 and 2012 will provide funds, offsetting part of the $70 billion in claims.
The FHA “has acted as a vital stabilizing force when an economic crisis precipitated by the housing market could have led to a second Great Depression,” Galante testified.
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