The Federal Housing Administration recently gave even odds that it would need a taxpayer bailout within the next year. But the reality is a lot worse, according to one housing expert.
"The FHA is effectively insolvent," said Edward Pinto, resident fellow at the conservative American Enterprise Institute.
The FHA denies this, calling AEI's claims "irresponsible.
The agency, which insures mortgages, has come under increased scrutiny in the last month after its recent actuarial report suggested there was a 50% chance it would need a bailout sometime next year.
The report also noted that the FHA has a $27 billion negative cash flow in its single-family program, but has $28 billion in total capital resources to offset that.
But Pinto claims that more rigorous accounting paints a bleaker picture. He points out that any private mortgage insurance company would assume that about 55% of the loans delinquent at least 60 days or in foreclosure would go to claim. As of October, FHA had 836,789 loans in that category, totaling $117 billion. Expected claims on that would be about $64.4 billion.
The FHA's most recent loss ratio, how much it pays on claims, was about 63%. That would mean the FHA would need $41 billion to pay claims, $13 billion more than its current assets.
FHA has increased its loan exposure from about $300 billion in late 2007 to more than $1 trillion now in response to private mortgage companies exiting the market in the wake of the housing bust.
FHA guaranteed 24% of new mortgages in fiscal 2011 ended Sept. 30. It was 30% in 2010.
In response to Pinto's claims, FHA pointed IBD to a mid-November blog post by Raphael Bostic, assistant secretary of the Department of Housing and Urban Development, FHA's parent. In it, Bostic referred to AEI's previous claims that the FHA is "next housing bailout" as untrue and misinformed.
Bostic claimed that while older FHA loans, such as those from 2007, are likely to result in substantial claims, newer mortgages are in better shape.
He cited the FHA's actuarial report which notes that "the new 2012 book of business will add $9 billion to the economic value.
"But the FHA has been saying all along, 'Not to worry, things got worse that last year, but it will balance out next year,'" responded Pinto. "But it keeps getting worse.
FHA's seriously delinquent rate — those loans at least 90 days late or in foreclosure — has grown since FHA has expanded into the mortgage market, from 5.5% at the end of fiscal 2007 to more than 9% in October 2011.
Pinto also notes that 17% of FHA-insured loans are at least 30 days delinquent, up from 16.8% in September. The delinquency rate for all home loans is 12.4%, according to the latest figures from the Mortgage Bankers Association.
FHA capital reserves were only about 0.24% of loan amounts as of September vs. about 0.5% a year earlier. Congress mandates a modest 2%.
HUD Secretary Shaun Donovan told lawmakers Thursday that FHA may need to raise insurance premiums for the fourth time since 2010.