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There are growing media reports that the FHA is in big financial trouble.  Is this true? What does this mean for South Florida – particularly Florida homeowners or those facing foreclosure problems in the Miami area?

We’ve all heard about the FHA, but what is it?  FHA stands for the Federal Housing Administration, and it is part of the Department of Housing and Urban Development, overseen and controlled by the President as part of the Executive Branch of Federal Government.

What the FHA Does for You, Florida….

The FHA has been helping Americans since 1934 to achieve the Great American Dream of home ownership.  It does this through various programs, funded by federal tax dollars:

first, the FHA insures home loans, acting sorta like a co-signer, so the bank feels safer and will offer the borrower a lower interest rate on their home loan.

second, by FHA insuring that the bank will be paid, the home owner gets a lower down payment and lower closing costs. For example, on a purchase of a 1 – 4 unit property, a borrower can get a home loan with FHA help with a down payment as small as 3.5% of the  purchase price, and the loan amount can be written so that the closing costs and fees get thrown into the loan and the borrower doesn’t have to bring that cash to the closing table.

third, the FHA works with the lenders on what the standards should be for FHA-loan qualifications and this means that it may be easier, credit-wise, for the borrower to qualify for a home loan.

fourth, the FHA has special programs to offer Americans, too.  Reverse mortgages for seniors, special loan deals for fixing up homes to make them more energy efficient, etc.

What is Happening to the FHA Now – Bad News for Florida

The news this week is that the Federal Housing Administration just reported to Congress that for the third year in a row, it has not met its legally-set minimum amount of money to have on reserve to meet all the mortgage insurance guarantees that it has issued to banks to cover home loans that went bad.

Which means that it’s very likely that the FHA is going to have to raise some cash.  How does the government agency do that?  Not many options here:  it can either charge higher premiums on its insurance (raise its prices) or it can ask for more taxpayer money (a subsidy).

It has to do something because by its own report, the net worth of the FHA is almost zip, de nada, ZERO. Which means that the work of the FHA must be helped with an influx of cash or there will be no FHA help for Florida or elsewhere.

It’s predicted that the FHA will get a bailout. No surprise there, right?  The FHA story isn’t over, however, because lots of banks haven’t filed their claims on bad home loans because they’ve been setting on those claims while they deal with the whole ForeclosureGate scandal.  The FHA is like an insurance carrier that knows a bunch of hurricane claims are going to be coming in for payment, but doesn’t have the money in the bank to pay them.

Which means the banks will be worried about those FHA loans – more for Florida homeowners dealing with underwater mortgages and other foreclosure issues to contemplate.  And it means that Florida buyers probably shouldn’t be too confident about readily available FHA loans for future purchases.

Here, the actual FHA press release:

WASHINGTON – The Department of Housing and Urban Development (HUD) today released its annual report to Congress on the financial status of the Federal Housing Administration (FHA) Mutual Mortgage Insurance (MMI) Fund. This insurance Fund is the backbone of the FHA single-family and reverse mortgage programs. In reporting on findings of the annual independent actuarial study, HUD indicates that, in the midst of continued weakness in housing markets across the county, the MMI Fund capital ratio remains positive this year at 0.24 percent. With new risk controls and premiums put in place by the Obama Administration, the independent actuaries predict the Fund will return to the Congressionally-mandated threshold of two percent capital more quickly than was projected by last year’s review. The economic value of new insurance endorsements in FY 2011 for the Fund was nearly double that of FY 2010 endorsements, being close to $11 billion.

As was the case last year, the new actuarial study shows that FHA is expected to sustain significant losses from loans insured prior to 2009, and thus its capital reserve remains below the congressionally mandated threshold of two percent of total insurance-in-force. However, the actuaries’ report concludes that, barring a further significant downturn in home prices, the MMI Fund will start to rebuild capital in 2012, and return to a level of two percent by 2014 – outpacing last year’s prediction. The actions taken by this Administration have put FHA into a position where the actuaries expect rapid growth in capital once the housing market begins a broad-based recovery.

“In the midst of a tough housing market the FHA MMI Fund continues to be actuarially sound,” said Acting FHA Commissioner Carol Galante. “Because of the Obama Administration’s strategy to protect the FHA Fund – tightening of risk controls, increased premiums to stabilize near-term finances, and expanded loss mitigation assistance to avoid unnecessary claims – this past year’s endorsements had the highest credit quality ever recorded, and will yield historically high levels of net receipts in the years ahead.”

FHA’s capital reserve ratio measures reserves in excess of those needed to cover projected losses over the next 30 years. The independent actuarial reviews of the MMI Fund estimate FHA’s capital reserve ratio to be 0.24 percent of total insurance-in-force this year, falling from 0.50 percent in 2010. FHA’s total liquid assets (cash plus investments) grew by $800 million since last year, to $33.7 billion. That amount is $1.9 billion higher than at the end of FY 2009, and is also $7.7 billion higher than was predicted last year by the independent actuaries. At the same time, the economic net worth of the Fund fell by $2.1 billion this year, from $4.7 billion to $2.6 billion, as FHA continued to build loss reserves to prepare for greater claims in the coming years.

Losses on loans insured through the first quarter of fiscal year 2009 continue to place a significant strain on the Fund and are expected to reach $26 billion within a few more years. Though they were prohibited in 2009, the ongoing effect of so-called “seller-funded downpayment assistance loans” is still significant. The net expected cost of those loans, as projected by the independent actuaries, grew by $1.8 billion over the past year to $14.1 billion. Conversely, the actuaries found that the FY2010 and FY2011 books are expected to be very profitable, providing significant net revenues to offset losses on earlier books. Loans insured to-date under the Obama Administration are providing $18 billion in economic value for the MMI Fund. Under the base-case forecast used by the independent actuaries, the FY 2012 book will add an additional $9 billion in economic value to the Fund.

Since taking office in 2009, the Obama Administration has instituted sweeping reforms to strengthen the MMI Fund. New policies have improved loan quality, strengthened lender enforcement, and helped to protect future loan performance. This has been the most comprehensive update to FHA credit policies, risk management, lender monitoring, and consumer protections in its history. To emphasize this new commitment to risk management, HUD hired the first-ever FHA Chief Risk Officer and established a permanent Risk Office to expand FHA’s capacity to assess financial and operational risk, perform more sophisticated data analysis, and respond to market developments. HUD also increased enforcement of FHA lenders, eliminated approval for loan correspondents, and increased net worth requirements for lenders wanting to underwrite FHA loans. Additionally, HUD introduced a new premium structure that better aligns with current market conditions, and it set underwriting minimums that combine credit score and down payment requirements to balance risk management with broad access to housing credit for borrowers who have historically met FHA credit quality standards. Specifically, a minimum down payment of 10 percent is now required of borrowers with credit scores below 580 and applicants with credit scores below 500 are no longer eligible for FHA insurance.

Over this past year, FHA:

Served more than 1.2 million households and insured $218 billion in single-family mortgages, bringing the active single family portfolio to more than $1 trillion.

Enabled more than 585,000 families to become homeowners for the first time. This represents 56 percent of all first-time buyers in the nation.

Helped more than 362,000 families avoid foreclosure through loss mitigation actions.

Helped 440,000 families to refinance their mortgage at lower interest rates, saving households an average of more than $160 per month.

Provided access to credit for close to 40 percent of all homebuyers needing mortgages, including 60 percent of all African-American and Hispanic homebuyers.

Reduced mortgage payments for 142,000 distressed homeowners through loan modifications. While standard modifications reduced typical payment burdens by 11 percent ($85), FHA HAMP actions reduced average mortgage costs by 24 percent ($218).

HUD’s report to Congress on the Financial Status of the MMI Fund, and FHA’s Fiscal Year 2011 Financial Status Briefing are available on HUD’s website,

The capital ratio, a measure of the insurance fund’s ability to withstand losses, fell to 0.24 percent in the year ended Sept. 30, from 0.50 percent a year earlier and 3 percent in 2008, the agency said. The FHA is required to maintain a ratio of at least 2 percent.

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