President Obama’s budget includes $943 million bailout for FHA

The FHA was hit hard during the recession after banks pulled back from lending, making the agency’s insured mortgages one of the only credit options for first-time home buyers, minorities and those with limited downpayment abilities.

Concern about the agency’s finances increased in the fall when an independent audit found that the FHA, which has more than $1 trillion worth of loans in its portfolio, had burned through its capital reserves because of bad mortgages, would come up $16.3 billion short. It would be the first time in the agency’s 79 years that it would require a bailout.

Still, Director Carol Galante, who has instituted a series of changes that have lessened the damage, said it remains to be seen what, if any, additional funding the FHA will need at the end of the fiscal year, when a determination will be made. 

No congressional action is needed to get funds.

During a Wednesday hearing at the House Financial Services Committee, Gary Thomas, president of the National Association of Realtors (NAR) credited Galante for taking several major steps to lower risk and improve the agency’s finances. 

“Realtors believe that recent increases to premiums, increased down payments for some borrowers and greater risk management controls will help to substantially improve the FHA’s financial condition,” he said. 

“These changes combined with an improving national economy and rising home prices will surely help stabilize the fund so that FHA can continue to serve the needs of hardworking American families who wish to purchase a home.”

Lawmakers also are picking up their efforts to overhaul the FHA, likely the first step in a broader attempt to bolster the housing market. 

Congress is also still aiming to reduce the role of Fannie Mae and Freddie Mac in the mortgage finance market.

In March, Democratic Rep. Maxine Waters, ranking member of the House Committee on Financial Services, and Rep. Michael Capuano, ranking member of the Subcommittee on Housing and Insurance, reintroduced a bill designed to help ensure FHA’s long-term solvency.

During Wednesday’s hearing, home builders pointed to the role the FHA played during the economic downturn arguing that it underscores the need for a “government backstop for both the primary and secondary mortgage markets,” said Kevin Kelly, first vice chairman of the National Association of Home Builders (NAHB).

“In times of crisis, private sources of mortgage credit have been unable or unwilling to meet housing capital needs,” he said. 

Without government support for home purchasing and refinancing, Kelly warned lawmakers that the nation’s mortgage markets “will grind to a halt in times of economic stress and uncertainty.”

“As the private market assumes a greater role in the mortgage marketplace, maintaining an appropriate level of government support is essential to preserve financial stability, promote investor confidence and ensure liquidity and stability for homeownership and rental housing,” Kelly said. 

He urged lawmakers to look at housing reform with a broad brush — including the FHA, along with Fannie and Freddie. 

David Stevens, president and CEO of the Mortgage Bankers Association, said lawmakers can further strengthen the FHA and promote the return of private capital by lowering loan limits from the levels that were necessary at the height of the housing crisis and adjusting downpayment requirements to balance other risks such as low credit scores . 

“However, the consequences to FHA’s traditional borrowers on each of the above suggestions could be significant if FHA employs overly stringent credit controls,” he said “Finding the right balance will be critical.”

He said lawmakers need to find a way to encourage “a competitive, responsible marketplace so business can grow.

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“That includes not just FHA, but also examining the future of the entire housing finance system,” Stevens said. 

“Ultimately, all stakeholders want the same thing, a fully functioning market that relies most heavily on private capital, with a limited, appropriate role for federal programs. A stable, sustainable FHA program must be a part of that system.”