FHA Reserves Below Minimum

The FHA's capital-reserve fund fell to $3.6 billion as of September 30th, leaving reserves at just 0.53% of the $685 billion in total loans insured by the FHA. This is far below the 2% requirement level that the FHA said it had breached months ago. The Secretary of HUD, Shaun Donovan, downplayed the FHA's problems and claims that the FHA won't need a federal subsidy except under the most severe economic scenarios. Like 10% unemployment, maybe? The problem is that projected capital losses in 2009 were worse than the most pessimistic assumptions from last year's review, so really, I'm not sure we should trust Mr. Donovan's reassurances of the agency's solvency.

Apparently, this is what happens when the government tries to prop up a mortgage market that was initially propelled aloft by private no-downpayment mortgages to people with terrible credit. While FHA-insured mortgages require small downpayments, they are still offered to borrowers with lousy credit. The only difference between FHAs and Alt-As is that FHA mortgages have very low fixed rate mortgages, so there is no surprise doubling or tripling of payments a few years down the road. Unfortunately, default rates on FHA insured mortgages are surging, proving that minimal downpayment mortgages to borrowers with terrible credit are extremely high risk, even with a fixed rate. The '08 vintage already has a 15% delinquency rate, handily outpacing earlier years' vintages. Furthermore, the volume of loans insured by the FHA jumped 75% in the 2009 fiscal year to more than a quarter of the mortgage market, from a mere 2% in 2006. During the second quarter the FHA backed nearly half of all mortgages made to first-time home buyers. No matter how much HUD tries to downplay it, it is inevitable that we will be bailing out the FHA too. So, sure the housing market is stabilizing. But at what cost to the rest of us?