What Does Potential FHA Bailout Mean for Housing in the US?

The Wall Street Journal is reporting that the Federal Housing Administration’s (FHA) reserves are close to being depleted and that the agency might need help from the US Treasury.

The Federal Housing Administration is expected to report this week it could exhaust its reserves because of rising mortgage delinquencies, according to people familiar with the agency’s finances, a development that could result in the agency needing to draw on taxpayer funding for the first time in its 78-year history.

The trouble stems from a growing pile of delinquent FHA-backed loans:

Though the agency guarantees fewer mortgages than either Fannie or Freddie, it now has more seriously delinquent loans than either of the mortgage-finance giants. Overall, the FHA insured nearly 739,000 loans that were 90 days or more past due or in foreclosure at the end of September, an increase of more than 100,000 loans from a year ago. That represents about 9.6% of its $1.08 trillion in mortgages guaranteed…

The FHA never relaxed its underwriting rules during the housing boom, and its market share plunged as private lenders offered loans on much easier terms. But the agency saw business soar as the housing bust deepened, first in 2007, as private lenders retreated, and later in 2008 and 2009, as Fannie and Freddie tightened standards.

Most of the agency’s losses now stem from loans made as the housing bust deepened. About 25% of mortgages guaranteed in 2007 and 2008 are seriously delinquent, compared with about 5% in 2010.

The situation is prompting debate about the agency’s role in the future:

Administration officials could announce measures that would either avert the need to draw on the Treasury or cushion the blow of such a move, such as raising mortgage-insurance premiums and finalizing additional legal settlements with lenders, industry analysts expect.

Republicans, however, have in the past argued for more aggressive action, including reducing maximum loan limits and raising minimum down payments. Another option would be to limit FHA-backed loans to borrowers below certain incomes.

Those steps would return the agency to its historic role of providing credit to first-time home buyers and underserved communities.