Reports of an FHA bailout were widespread this weekend after the House heard testimony from a former Fannie Mae exec that the agency is heading over a cliff, with $40 billion in projected losses that will have to be offset by taxpayer dollars to buffer a flailing mortgage market.
But the current FHA chief dismissed the analysis as unfounded.
At the same time, however he admits that a yet-to-be released audit will show a shortfall in reserves, below the legal limit for the agency. In related reports, the agency’s loan default rate may be as high as 20%.
Still, the agency chief denies that FHA is in trouble. He claims that reserves will rise, not fall short over the next two years as home prices continue to rebound.
Speculation over FHA’s financial soundness is nothing new. Many experts have predicted that the agency is playing it too risky by allowing low down payments when negative equity is eroding the housing market. One referred to the practice as “pseudo-subprime.”
Expert testimony concluded last week with recommendations that FHA increase down payment requirements to 10%, lower the (recently elevated) cap on loan amounts, and require lenders to co-insure FHA loans.
However, for now, lawmakers appear willing to look the the other way, and remain optimistic in the housing recovery. As Congresswomen Maxine Waters puts it, “Without the FHA, there would be no mortgage market right now.