(BN) FHA Shortfall Seen at $54 Billion May Lead to Bailout (Update2)‏

FHA Shortfall Seen at $54 Billion May Lead to Bailout (Update2)2009-10-08 19:48:42.891 GMT (Adds comments from FHA head starting in third paragraph,lawmakers in fifth.) By Jody ShennOct. 8 (Bloomberg) -- The Federal Housing Administration,which insures mortgages with low down payments, may require aU.S. bailout because it has $54 billion more in losses than itcan withstand, a former Fannie Mae... [more]

FHA Shortfall Seen at $54 Billion May Lead to Bailout (Update2)2009-10-08 19:48:42.891 GMT (Adds comments from FHA head starting in third paragraph,lawmakers in fifth.) By Jody ShennOct. 8 (Bloomberg) -- The Federal Housing Administration,which insures mortgages with low down payments, may require aU.S. bailout because it has $54 billion more in losses than itcan withstand, a former Fannie Mae executive said.“It appears destined for a taxpayer bailout in the next 24to 36 months,” consultant Edward Pinto said in testimonyprepared for a House committee hearing in Washington today.Pinto was the chief credit officer from 1987 to 1989 for FannieMae, the mortgage-finance company that is now government-run.The FHA program’s volumes have quadrupled since 2006 asprivate lenders and insurers pulled back amid the U.S. housingslump, Pinto said. The jump has left the agency backing riskyloans and exposed to fraud in a “market where prices have yetto stabilize,” he said.The agency doesn’t need aid, in part because new guaranteesare being made “at or close to the bottom” in values, FHACommissioner David H. Stevens said.Representative Scott Garrett, a New Jersey Republican,introduced legislation this month to boost the FHA’s minimumdown payment to 5 percent from 3.5 percent to help shore up theagency’s insurance fund.The market, which is struggling to recover, may also getless help from government aid programs that may lapse, includingbuyer tax credits and the Federal Reserve’s effort to cut loanrates by buying bonds. The Next Subprime Representative Maxine Waters, a California Democrat, saidat the hearing it is a “myth” the FHA is the “nextsubprime.” West Virginia Republican Shelley Moore Capito toutedthe agency’s role in serving first-time buyers as it backs athird of loans for home purchases. She also said moreconsideration should be given to anti-fraud efforts and whethersome consumers should pay more.Falling prices will push the FHA’s single-family fund’sreserves below a 2 percent cushion above projected lossesrequired by Congress, Stevens said last month. The shortfallwill be cured in two to three years, he said today.The idea the FHA needs a rescue is “just plain wrong,”Stevens said in an Oct. 6 letter to the Wall Street Journal.That’s in part because the FHA’s accounting method means itsreserves are enough to cover more than 30 years of projectedlosses, assuming no revenue from new business. New loans arealso less risky because a “pullback” by private insurers hasleft the agency protecting lenders on better mortgages, he saidtoday.FHA’s total reserves exceed $30 billion, or more than 4.4percent of its insurance, according to Stevens. The loan-insurance ratio, which compares the reserves with the loansinsured, was 6.4 percent a year ago, government data show. Tighten Credit The agency said last month it would tighten some credit,appraisal and lender standards and appoint a chief risk officer.In the first half of the year, FHA insured more than $178billion of new mortgages, or about 19 percent of the total,according to the newsletter Inside Mortgage Finance.First-time buyers account for about 78 percent of FHA loansfor home purchases, while minorities represent 30 percent,according to prepared remarks by David Kittle, chairman of theMortgage Bankers Association.Official figures on FHA’s reserves as of Sept. 30 won’tshow a shortfall when released because “the assumptions usedwill be overly optimistic relative to loss mitigation resultingfrom both loan modifications and recent and expectedunderwriting changes,” Pinto said. Regulators Seized In December, three months after regulators seized FannieMae and rival Freddie Mac of McLean, Virginia, Pinto toldlawmakers “taxpayers will have to stand behind hundreds ofbillions of dollars” of losses at the companies. That wasbefore the firms tapped almost $100 billion of their capitallifelines at the Treasury, which this year grew to $200 billion.Pinto’s testimony says he based his FHA estimates onperformance projections for high loan-to-value ratio loansinsured by Fannie Mae in 2006, about 20 percent of which heexpects to default costing 50 percent of balances.About 14.4 percent of FHA loans were delinquent as of June30 and 2.98 percent were already being foreclosed upon,according to the Mortgage Bankers Association. The combinedpercentage for all mortgages was a record 13.16 percent,according to data from the Washington-based trade group, whichsaid the share of FHA loans past due is being suppressed by thelarge amount of new debt.Boyd Campbell, testifying on behalf of the NationalAssociation of Realtors, said the FHA has helped avoid a worsecollapse. Solid Requirements “Due to solid underwriting requirements and responsiblelending practices, FHA has avoided the brunt of defaults andforeclosures facing the rest of the real estate financeindustry,” Campbell said in his prepared testimony.FHA loans charge 1.75 percent initially and 0.55 percentannually for home-loan insurance. The agency generally wantslenders to require housing payments to be less than 31 percentof borrowers’ pretax income and for pay to be fully documented.Those are tougher hurdles than once required by so-calledsubprime mortgages, which have dwindled since 2007. [less]