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See also FHFA, HAMP and mortgage modification.



In 1965, the Federal Housing Administration became part of the United States Department of Housing and Urban Development (HUD).

Since 1934, the FHA and HUD have insured over 34 million home mortgages and 47,205 multifamily project mortgages. Currently, the FHA has 4.8 million insured single family mortgages and 13,000 insured multifamily projects in its portfolio. [1]

The Federal Housing Administration is the only government agency that is completely self-funded. However, although it claims to operate solely from its own income at no cost to taxpayers, there is an implicit guarantee that the taxpayer will help them in times of need.

During budget planning for 2008 HUD had been projecting $143,000,000 budget shortfall stemming from the FHA program. This is the first time in three decades HUD had made a request to Congress for a taxpayer subsidy. Even though FHA is statutorily required to be budget neutral, the Government Accountability Office (GAO) is projecting taxpayer funded subsidies of half a billion dollars over the next three years, if no changes are made to the FHA program.

Following the subprime mortgage crisis, FHA, along with Fannie Mae and Freddie Mac, became the source of much of the United States mortgage financing.

The share of FHA mortgages went from 2 percent to over one-third of mortgages in the country. Without the subprime market, many of the riskiest borrowers ended up borrowing from the Federal Housing Administration, and the FHA could suffer substantial losses.

Joshua Zumbrun and Maurna Desmond of Forbes have written that eventual government losses from the FHA could reach $100 billion.Lending Over Backward and The Next Hit: Quick Defaults

Capital ratio is below statutorily mandated threshold

SUMMARY: A recently issued independent actuarial study shows that the Mutual Mortgage Insurance Fund (MMIF) capital ratio has fallen below its statutorily mandated threshold.

House passes legislation to help homeowners, reform FHA

The U.S. House of Representatives passed legislation introduced by Congresswoman Maxine Waters (D-CA) to help families realize the dream of homeownership, protect Americans from mortgage fraud and save taxpayers money. The FHA Reform Act of 2010 (H.R. 5072) ensures that the Federal Housing Administration (FHA) remains viable and continues its mission of insuring mortgage loans. The bill passed overwhelmingly by a vote of 406-4.

For further information about the FHA Reform Act click here.

“The FHA Reform Act is important for households across the country because it will enable FHA to respond to the current housing and economic crisis and continue to provide opportunities to millions of Americans for homeownership. As the private market has contracted, FHA has stepped into the void and injected much-needed credit into our mortgage system. Increasingly, it is the only option available for American homebuyers with less than a 20 percent down payment,” said Congresswoman Waters.

FHA has filled a vital role in the nation’s economy, helping 37 million Americans attain homeownership since 1934. FHA insurance has been particularly important for minority communities, low-income families, and first-time homebuyers.

Congresswoman Waters, chairwoman of the Subcommittee on Housing and Community Opportunity, drafted the FHA Reform Act in response to news that FHA’s reserves had fallen below the two percent level required in law. The Act will strengthen FHA’s finances and save taxpayers $2.5 billion over five years, while still providing affordable mortgage insurance to the individuals FHA is intended to serve.

H.R. 5072 also provides FHA with enhanced authority to crack down on lenders engaged in fraud or misrepresentation or failing to comply with FHA guidelines for originating or underwriting loans. “Families, neighborhoods and the nation’s housing market have been hurt by irresponsible lending and mortgage fraud schemes, and we need to make sure homebuyers are protected. FHA has already taken steps to increase its lender enforcement activities, and this bill empowers the agency to root out the bad actors while reserving the program for the lenders that follow the rules,” Congresswoman Waters said.

In addition, Congresswoman Waters’ legislation requires FHA to improve its internal controls to better manage risk and to provide transparent data to the public and to Congress. This includes improving monitoring of early defaults and claims, tracking mortgage information by loan servicer, providing FHA with the ability to contract out for additional credit risk analysis, requiring mortgagees to report to FHA when they stop buying loans from other mortgagees and requiring a Government Accountability Office study on FHA and Ginnie Mae. The bill also creates a new Deputy Assistant Secretary at FHA for Risk Management and Regulatory Affairs.

Congresswoman Waters drafted the legislation after conducting three hearings on FHA in the last six months. She worked closely with both Democratic and Republican colleagues to produce a bill that gained bipartisan support.

H.R. 5072 has the support of a diverse group of organizations including the National Urban League, the National Council of La Raza, the National Community Reinvestment Coalition, the Mortgage Bankers Association, the National Association of Realtors and the National Association of Home Builders.

House Fin Services Comm approves FHA Reform Act

Today, the House Financial Services Committee approved legislation to ensure that the Federal Housing Administration (FHA) remains viable and continues its mission of insuring mortgage loans.

Congresswoman Maxine Waters (D-CA), Chairwoman of the Housing and Community Opportunity Subcommittee, drafted the FHA Reform Act of 2010 (H.R. 5072) in response to recent events that caused FHA’s reserves to fall below the two percent level required in law. The Act will empower FHA to improve its financial position by allowing the agency to adjust its premium structure for new borrowers, while still providing affordable mortgage insurance to the individuals FHA is intended to serve including low-income and minority borrowers and individuals in traditionally underserved areas.

FHA has filled a vital role in the nation’s economy, helping 37 million Americans attain homeownership since 1934 and providing crucial insurance at a time when the private market has pulled back from the mortgage market.

“The economic crisis that started a couple of years ago and declining home prices have caused FHA’s capital reserves to deteriorate in recent months, but under the leadership of Secretary Shaun Donovan and FHA Commissioner David Stevens, FHA has taken unprecedented administrative and regulatory steps to improve risk management and root out bad actors participating in the program,” Congresswoman Waters said. “This legislation makes essential reforms to strengthen FHA’s finances.”

H.R. 5072 also provides FHA with enhanced authority to terminate lenders’ approval to originate or underwrite loans backed by FHA insurance when FHA finds evidence of fraud or noncompliance. Such enhanced authority is needed, particularly in light of the recent cases of Lend America and Taylor Bean and Whitaker, who perpetuated fraud schemes spanning many years.

In addition, Congresswoman Waters’ legislation requires FHA to improve its internal reporting systems to better manage risk and to provide transparent data to the public and to Congress. This includes improving monitoring of early defaults and claims, tracking mortgage information by loan servicer, providing FHA with the ability to contract out for additional credit risk analysis, requiring mortgagees to report to FHA when they stop buying loans from other mortgagees and requiring a Government Accountability Office study on FHA and Ginnie Mae. The bill also creates a new Deputy Assistant Secretary at FHA for Risk Management and Regulatory Affairs.

Congresswoman Waters drafted the legislation after conducting three hearings on FHA in the last six months.

H.R. 5072 has the support of a diverse group of organizations including the National Urban League, the National Council of La Raza, the National Community Reinvestment Coalition, the Mortgage Bankers Association, the National Association of Realtors and the National Association of Home Builders.

Obama Administration seeks public input on reform of the housing finance system

The Obama Administration today released questions for public comment on the future of the housing finance system, including Fannie Mae and Freddie Mac, and the overall role of the federal government in housing policy. The questions have been designed to generate input from a wide variety of constituents, including market participants, industry groups, academic experts, and consumer and community organizations. The questions will also be published in a Federal Register notice requesting public comments, and information on the process for submitting comments will be included in that notice.

"A well-functioning housing finance system is critical to the long term stability of the housing market," said Treasury Secretary Tim Geithner. "Hearing from a wide variety of perspectives as we embark on this process is an important part of establishing a more stable and sound housing finance system for the American people."

"This open process will help shape the future of our housing finance system," said U.S. Housing and Urban Development (HUD) Secretary Shaun Donovan "The Obama administration is committed to engaging the public as we consider proposals for reforming the housing finance system in the context of our broader housing policy goals, and the best steps to get from where we are today to a stronger housing finance system."

The Obama Administration will seek input in two ways. First, the public will have the opportunity to submit written responses to the questions published in the Federal Register online at www.regulations.gov. Second, the Administration intends to hold a series of public forums across the country on housing finance reform. Together these opportunities for input will give the public the chance to deepen the federal government's understanding of the issues and to shape the policy response going forward.

This effort is both in keeping with this Administration's commitment to openness and transparency and the President's Open Government Initiative. This initiative represents a major change in the way federal agencies interact with the public by making agency operations and data more transparent and creating new ways for citizens to have an active voice in their government.

Questions for Public Solicitation of Input:

1. How should federal housing finance objectives be prioritized in the context of the broader objectives of housing policy?

Commentary could address: policy for sustainable homeownership; rental policy; balancing rental and ownership; how to account for regional differences; and affordability goals.

2. What role should the federal government play in supporting a stable, well-functioning housing finance system and what risks, if any, should the federal government bear in meeting its housing finance objectives?

Commentary could address: level of government involvement and type of support provided; role of government agencies; role of private vs. public capital; role of any explicit government guarantees; role of direct subsidies and other fiscal support and mechanisms to convey such support; monitoring and management of risks including how to balance the retention and distribution of risk; incentives to encourage appropriate alignment of risk bearing in the private sector; mechanisms for dealing with episodes of market stress; and how to promote market discipline.

3. Should the government approach differ across different segments of the market, and if so, how?

Commentary could address: differentiation of approach based on mortgage size or other characteristics; rationale for integration or separation of functions related to the single-family and multi-family market; whether there should be an emphasis on supporting the production of subsidized multifamily housing; differentiation in mechanism to convey subsidies, if any.

4. How should the current organization of the housing finance system be improved?

Commentary could address: what aspects should be preserved, changed, eliminated or added; regulatory considerations; optimal general organizational design and market structure; capital market functions; sources of funding; mortgage origination, distribution and servicing; the role of the existing government-sponsored enterprises; and the challenges of transitioning from the current system to a desired future system.

5. How should the housing finance system support sound market practices?

Commentary could address underwriting standards; how best to balance risk and access; and extent to which housing finance systems that reference certain standards and mortgage products contribute to this objective.

6. What is the best way for the housing finance system to help ensure consumers are protected from unfair, abusive or deceptive practices?

Commentary could address: level of consumer protections and limitation; supervising agencies; specific restrictions; and role of consumer education

7. Do housing finance systems in other countries offer insights that can help inform US reform choices?

FHA raises down payments, premiums amid mortgage delinquencies

The Federal Housing Administration is raising insurance rates and tightening credit-score rules to combat a rise in delinquencies, making a government-guaranteed mortgage more expensive for U.S. homebuyers.

The premiums FHA charges to insure mortgages will rise to 2.25 percent from 1.75 percent this year, the agency said in a statement yesterday. Borrowers who have credit scores below 580 will also have to make down payments of at least 10 percent, and allowable seller concessions will be cut by half.

The agency, which guarantees almost one-third of loans used in home purchases, is grappling with a 14 percent delinquency rate after taking on more risk to resuscitate the housing market when private industry sources evaporated. Defaults pushed mortgage insurance reserves to the lowest level in history last fiscal year, prompting the Obama administration to take bolder steps in shoring up the FHA’s finances.

“Striking the right balance between managing the FHA’s risk, continuing to provide access to underserved communities and supporting the nation’s economic recovery is critically important,” FHA Commissioner David H. Stevens said in the statement.

Affordable housing advocate David Berenbaum, chief program officer for the National Community Reinvestment Coalition in Washington, called the FHA’s changes “prudent.”

“While borrowers will bear more of the costs of the government insurance program through higher premium charges, the additional revenue will help ensure that FHA stays solvent,” Berenbaum said in a statement. “While some less creditworthy borrowers will need higher down payments, this is a necessary move in markets where a decline in home value can wipe out a new buyer’s equity within weeks after the settlement.”

Seller Aid

In addition to the upfront premium cost of 2.25 percent, the legal maximum, the FHA said it plans to ask Congress for permission to increase a separate annual premium. The new premium will take effect in the spring, the FHA said, without being more specific. The other changes will happen in the summer.

The FHA is cutting the amount of aid sellers can contribute to homebuyers’ closing cost to 3 percent from 6 percent of the purchase price. The FHA said the higher 6 percent concession led to inflated purchase prices.

The agency’s main credit score-related requirement has been that borrowers with scores below 500 put at least 10 percent down. Most other borrowers received loans with 3.5 percent down. Consumer credit scores, called FICOs after their creator, range from 300 to 850. The median is about 720, according to data provided by Minneapolis-based FICO last year.

Loan Reserves

The U.S. housing market has been kept alive by low interest rates, cheaper homes, a homebuyer tax credit, FHA-related lending and financing initiatives through Fannie Mae and Freddie Mac. The FHA, along with federally controlled finance companies Fannie Mae and Freddie Mac, accounted for more than 90 percent of all U.S. home loans in the first half of 2009.

The FHA’s net capital ratio, or reserves after accounting for projected losses, fell to 0.53 percent in the year ended in September, from 3 percent in fiscal 2008 and 6.4 percent in 2007, according to an annual review published in November.

The ratio is the lowest since the FHA began publishing the data in 1990 and is below the 2 percent reserve threshold the agency is required to maintain by Congress. Donovan said in November that it’s “critical” to build that cushion back up.

While the FHA said at the time that the fund “has good prospects,” it said it would change its risk models to account for the possibility of the ratio falling below zero.

FHA turns to lenders to police brokers

The Federal Housing Administration, the government agency that insures a bigger and bigger portion of home loans, plans to rely more heavily on lenders to police mortgage brokers.

The changes will put more of the onus on lenders to make sure there is no fraud or faulty underwriting in the loans they fund, and less on the FHA. The lenders could be held liable for losses if a loan insured by the FHA goes bad and there are signs of fraud or mistakes in the underwriting.

The new approach comes as the FHA is straining to monitor mortgage brokers seeking to arrange FHA-backed loans, a number that has mushroomed in the last few years.

The FHA doesn't make loans. Instead, it guarantees lenders against losses on loans made by FHA-approved lenders and brokers. Brokers serve as middlemen between borrowers and lenders.

Because it didn't loosen its lending standards, the FHA largely sat out the subprime-mortgage boom. When defaults sent housing and financial markets reeling, lenders and brokers scurried to the FHA for backing on loans that had become hard to fund otherwise. The agency's market share rose to about one-third of the mortgage market last year, up from 2% in 2006.

As a result, the number of brokers approved to arrange FHA-backed loans swelled to 9,043 at the end of 2009, from 5,759 two years earlier. The FHA has required mortgage brokers to submit an annual audit to the agency and to maintain a $63,000 net worth. It also tracks the performance of brokers' loans.

But the FHA says it isn't equipped to monitor thousands of mortgage brokers. "For us as a government agency to be expected to police small mortgage brokers, that doesn't make any sense," said FHA Commissioner David Stevens.

Instead, the agency wants to beef up oversight of lenders and revamp itself along the lines of other mortgage investors that guarantee or buy loans in the secondary market, such as Fannie Mae and Freddie Mac.

Under changes set to take effect May 20, the FHA will stop certifying mortgage brokers or tracking the individual performance of loans that they originate. Instead, it will require lenders to sponsor brokers and to assume responsibility for those loans, including losses from fraud or poorly underwritten loans, such as those in which the income stated on a loan application doesn't match accompanying financial documents.

Broader provision of credit to the private sector by government

Taxpayer losses from supporting Fannie Mae and Freddie Mac will top $400 billion, according to Peter Wallison, a former general counsel at the Treasury who is now a fellow at the American Enterprise Institute.

“The situation is they are losing gobs of money, up to $400 billion in mortgages,” Wallison said in a Bloomberg Television interview. The Treasury Department recognized last week that losses will be more than $400 billion when it raised its limit on federal support for the two government-sponsored enterprises, he said.

The U.S. seized the two mortgage financiers in 2008 as the government struggled to prevent a meltdown of the financial system. The debt of Fannie Mae, Freddie Mac and the Federal Home Loan Banks grew an average of $184 billion annually from 1998 to 2008, helping fuel a bubble that drove home prices up by 107 percent between 2000 and mid-2006, according to the S&P/Case- Shiller home-price index.

The Treasury said on Dec. 24 it would provide an unlimited amount of assistance to the companies as needed for the next three years to alleviate market concern that the government lifeline for Fannie Mae and Freddie Mac, the largest source of money for U.S. home loans, could lapse or be exhausted.

Lax regulation of Fannie Mae and Freddie Mac led to the mortgage companies taking on too many risky loans, Wallison said. “It turns out it was impossible to regulate them,” he said. “They were too powerful.” He said no one knows how much will be needed to keep the companies solvent.

From 1990 to 1999, Wallison served on the board of directors of MGIC Investment Corp., the largest U.S. mortgage insurer, including a stint on the audit committee, according to Bloomberg data and company filings.

The continued government support of Fannie Mae and Freddie Mac makes buying their debt a good investment, Wallison said. “It was always safe to buy these notes,” he said. The U.S. government was always going to stand behind them. They’re as good as Treasury notes.”

Treasury completes efforts to support state and local housing

Initiative Expands Resources for Working Families to Access Affordable Rental Housing and Home Ownership

WASHINGTON - The U.S. Department of the Treasury, together with the Department of Housing and Urban Development (HUD), and the Federal Housing Finance Agency (FHFA) today announced the completion of all transactions under the recently-introduced state and local Housing Finance Agency (HFA) Initiative, a key element of the Obama Administration's Homeowner Affordability and Stability Plan. With these transactions, the Obama Administration helps support low mortgage rates and expands resources for low and middle income borrowers to purchase or rent homes that are affordable over the long term. Government Sponsored Enterprises Fannie Mae and Freddie Mac played a central role in both Initiative design and transaction execution. The HFA Initiative is expected to come at no cost to taxpayers.

Through more than 90 participating HFAs, the HFA Initiative will make affordable financing available to hundreds of thousands of new homebuyers and existing homeowners, as well as support the development and rehabilitation of multi-family rental properties. Mortgages can be used to purchase or rehabilitate homes, as well as refinance existing mortgages at more affordable rates.

Participating HFAs are also expected to provide affordable multifamily loans that will help keep rents affordable for tens of thousands of renters. Participating state and local agencies have already begun providing affordable mortgages financed through the HFA Initiative.

"Supporting the work of state and local HFAs is critical to the Administration's broader initiative to stabilize the housing market, which is helping to keep mortgage rates low and mortgage finance flowing for American households across the country," said Treasury Secretary Tim Geithner.

"The assistance provided under the HFA Initiative will help maintain the viability of state and local HFAs which play key roles in HUD's efforts to promote expanded access to affordable rental housing and serve as important players in making homeownership possible for hardworking Americans who otherwise would not be able to purchase or remain in their homes," said HUD Secretary Shaun Donovan.

"Working together we were able to address the stresses on HFAs created by the housing market turmoil," said FHFA Acting Director Edward J. DeMarco. "The Enterprises played a critical role, consistent with their mission and on commercially reasonable terms. Their successful execution of over 125 separate transactions, all in the final month of 2009, was an impressive achievement."

"Given our long-standing partnership with state and local HFAs, we were able to move quickly to support the Administration's initiative, which is targeted directly at affordable housing for America's working families," said Michael J. Williams, Fannie Mae President and CEO. "By creating $23 billion in much-needed, new housing capital for the housing finance system, this initiative will enable the HFAs to return to the level of market liquidity they have provided historically."

"We applaud the successful completion of the HFA Initiative. Freddie Mac is proud to provide an essential financial link to the nation's state and local HFAs that will support affordable homeownership and rental housing and help stimulate America's housing markets," said Freddie Mac CEO Ed Haldeman.

Local and State Impact of the Initiative

"These bond proceeds, combined with the $7.7 billion in retail housing bonds the Initiative requires state HFAs to issue, will allow HFAs to finance more than 200,000 affordable homes, while generating jobs and tax revenue for the economy," said Susan Dewey, president of the National Council of State Housing Agencies (NCSHA) and executive director of the Virginia Housing Development Authority. "HFAs are already putting these resources to work to provide first-time home buyer mortgages and finance rental housing," Dewey added.

"The National Association of Local Housing Finance Agencies (NALHFA) applauds the Treasury, Federal Housing Finance Agency, and especially the Government-Sponsored Enterprises for putting together, in a nearly impossible timeframe, this vital bond purchase program and liquidity facility. It will give participating local housing finance agencies the ability to significantly expand homeownership and rental housing opportunities for their lower income households," said NALHFA President Patricia Braynon, Executive Director of the Miami-Dade County, FL Housing Finance Authority.

"The Treasury Initiative will provide loans to approximately 11,000 home buyers in Pennsylvania, as well as putting our home builders back to work," said Executive Director of the Pennsylvania Housing Finance Agency Brian Hudson. "I believe a new and stronger partnership has been formed between the Administration, the GSEs, and state HFAs to deliver affordable housing across the nation."

"As one of many HFAs that have participated in the Administration's HFA Initiative, the Idaho Housing and Finance Association has been able to once again access the tax-exempt bond markets for affordable homeownership lending capital," said President and Executive Director of the Idaho Housing and Finance Association Gerald Hunter. "Many prospective home buyers will be able to purchase homes because of this financing opportunity. And, it comes at a time when our economy needs all the assistance it can get. We appreciate the professional and focused efforts by the many staff members at Treasury, HUD, FHFA, Fannie Mae, and Freddie Mac to make this opportunity available for our citizens."

Background on the HFA Initiative

On October 19, Treasury announced a new initiative for state and local HFAs to help support low mortgage rates and expand resources for low and middle income borrowers to purchase or rent homes that are affordable over the long term. Following up on the intent to support HFAs first outlined in February under the Homeowner Affordability and Stability Plan, the Administration's Initiative has two parts: a New Issue Bond Program (NIBP) to support new lending by HFAs and a Temporary Credit and Liquidity Program (TCLP) to improve the access of HFAs to liquidity for outstanding HFA bonds.

The New Issue Bond Program (NIBP)

The New Issue Bond Program (NIBP) provided temporary financing for HFAs to issue new housing bonds. Treasury purchased securities of Fannie Mae and Freddie Mac backed by these new housing bonds. With these investments, the HFAs have issued an amount of new housing bonds equal to what they are authorized to issue with the allocations provided them by Congress but have been unable to issue given the current challenges in housing and related markets. The program may support up to several hundred thousand new mortgages to first time homebuyers this coming year, as well as refinancing opportunities to put at-risk, but responsible and performing, borrowers into more sustainable mortgages. The NIBP will also support development of tens of thousands of new rental housing units for working families.

The Temporary Credit and Liquidity Program (TCLP)

Fannie Mae and Freddie Mac are administering a Temporary Credit and Liquidity Program (TCLP) for HFAs to help relieve current financial strains and enable them to continue to serve their important role in providing housing resources to working families. Treasury has agreed to purchase a participation interest in the Temporary Credit and Liquidity Facilities (TCLFs) provided to HFAs under the program, providing a credit and liquidity backstop. The TCLP provides HFAs with temporary credit and liquidity facilities to help the HFAs maintain their financial health and preserve the viability of the HFA infrastructure so that HFAs can continue their Congressionally supported role in helping provide affordable mortgage credit to low and moderate income Americans, as well as continue their other important activities in communities.

Over 90 state and local HFAs representing 49 states participated in the NIBP for an aggregate total new issuance of $15.3 billion. Twelve HFAs participated in the TCLP for an aggregate total usage of $8.2 billion. The Initiative is expected to come at no cost to the taxpayers and to the Government Sponsored Enterprises.

For more information about the HFA Initiative, go to http://www.financialstability.gov/latest/tg_10192009.html.

Is the FHA at risk?

The bankruptcy of America is getting borderline hilarious, even as stock capitalization surges by about $1 trillion based on funny money to be printed by the ECB with the Fed's assistance. In the second coming of moral hazard, one piece of news that some may have missed is Fannie Mae's earlier announcement that the mortgage lender is now more bankrupt than ever before - the firm lost $13.1 billion in net income on $3 billion in revenue. "The first-quarter loss resulted in a net worth deficit of $8.4 billion as of March 31, 2010, taking into account a $3.3 billion reduction in our deficit related to the adoption of new accounting standards, as well as unrealized gains on available-forsale securities during the first quarter.

The Acting Director of the Federal Housing Finance Agency has therefore asked Treasury to provide us $8.4 billion on or prior to June 30, 2010." Additionally, the Fed backstopped entity also announced that "there is uncertainty regarding future of business after conservatorship terminated and expect this uncertainty to continue." But since in America asset prices have not reflected fundamentals in over a year, nobody gives a rat's ass. And the political whores in DC feel like beating up anyone who even dares to mention this particular $7 trillion dollar question mark which is equivalent to 50% of total US debt, so expect no reform to happen here, just like nothing happened with HFT, until the markets hits 1 quadrillion or zero. For all intents and purposes, the two outcomes are equivalent.

Full Fannie press release.

"New York City bus driver Steven Mitchell is two months behind on mortgage payments for a home loan guaranteed by Uncle Sam and part of a growing first-time home owner population at risk of foreclosure.

"It is embarrassing to lose your home," Mitchell told CBS News.

His home in the Far Rockaway section of Queens, New York, has a mortgage insured by the Federal Housing Administration, known as the FHA, which does not grant home mortgages, but insures them.

FHA loan volume has soared - quadrupling in the past three years. In 2006, 425,000 borrowers acquired FHA-backed loans.

This year, nearly half of all first-time home buyers in the U.S., a total of 1.8 million, used FHA-insured financing to refinance or make a new purchase.

Part of the appeal is the FHA allows a down payment as low as 3.5 percent of the purchase price.

"The current degree of FHA predominance in the market is unparalleled," Department of Housing and Urban Development Inspector General Kenneth Donahue told Congress earlier this year. FHA is part of HUD.

Mitchell has a monthly payment of $3,200, hefty for a bus driver earning $47,000 a year, but his brother and a friend who live with them were helping with the payments until they lost their jobs, leaving Mitchell juggling the household bills by himself.

"As long as everything was still being paid, everybody was doing a part, it could have been done," Mitchell said.

Mitchell's home is one of 5.5 million purchases or refinances worth a total of $696 billion currently insured by the FHA.

Watchdogs worry that eight-and-half percent of those loans are at least 90 days delinquent or in foreclosure proceedings, half a percent above the national average, and well above FHA's traditional two-percent of home loans that are seriously delinquent.

"I call it FHA insurance Armageddon," Gary Lacefield, a former HUD investigator, told CBS News.

"Sometime in the next 15 to 18 months you're going to see a major hit on the FHA insurance fund," Lacefield says.

In fact, the FHA projects it could pay out $27 billion over the next 30 years to cover expected defaults, leaving it with only $4 billion of its $31 billion cash on hand.

That would sink the FHA's capital reserves below the congressionally-mandated two-percent of its loan portfolio, but the agency says no bailout is in the offing.

"When you compare FHA to any other player in the mortgage finance system, we're the last institution standing supporting the housing market with capital on our own, not asking for any congressional subsidy or taxpayer subsidy," FHA Commissioner David Stevens said.

Since taking over the FHA in July, Stevens has raised borrower standards. For example, the average borrower's credit score has risen from 633 in 2007 to 693 today, as the FHA business has expanded from traditionally lower-income borrowers across the income spectrum.

FHA-insured loans are for single-family owner-occupied properties with 30-year fixed rate mortgages. But it's up to the loan underwriters to verify borrower income and assets.

Responding to the FHA foreclosure spike, Congress banned the practice of some lenders making the down payment for FHA-insured borrowers, and the FHA itself limited the amount of cash borrowers could take out in a refinance.

Critics say as the pool of FHA-authorized lenders has grown from 10,333 three years ago to 13,419 today, the FHA's ability to police them has lagged, specially with only 10 staffers dedicated to reviewing lenders.

At the same time, the FHA may be overwhelmed by the sheer volume of loans. It has only 172 staffers assigned to review loan applications, and they look only at a sample.

Even with 30 more lenders, the FHA points out the new lenders account for only five-percent of current loan originations.

After lenders repackage and sell the portage debt, 10 institutions service 90 percent of all FHA loans, according to mortgage banking consultant Brian Chappelle of Potomac Partners LLC.

Just two institutions, Bank of America and Wells Fargo, service over half the FHA loans, Chappelle said.

Fraud investigator Lacefield is surprised certain lenders - with borrower default rates in double digits - are still doing FHA business.

"I mean 10 percent would be high, but when you see 20 and 22 percent," Lacefield says, "These companies are still active and originating loans, which is pretty scary."

The FHA has sanctioned 593 lenders this year for violating rules, according to HUD press secretary Melanie Roussell, and has revoked the license of some, including Great Country Mortgage Bankers of Coral Gables, Fla., Madison Home Equities Inc. of Carle Place, N.Y., and Taylor Bean and Whitaker Mortgage of Ocala, Fla.

Taylor Bean and Whitaker was the FHA's fifth-largest loan underwriter with $25 billion in outstanding loans and $600 million in default.

HUD's Inspector General has noted that some problem lenders have regained admission into the FHA program. After its license was suspended, First Magnus "restitutions under a different name but operates in the same location" as Stonewater Mortgage, according to the IG's office.

"We look at every institution that underwrites loans using FHA mortgages. We look at them on a monthly basis, and we look at every outlier," Stevens said.

One of the biggest outliers is Lend America of Melville, New York, which aggressively marketed its services with TV ads that looked like a newscast.

"Reduce monthly payments, reduce adjustable rates loans, consolidate debt, one low monthly payment, or take cash out for any reason," the announcer bellowed in the ads. "Close in a little as 10 days."

It turns out Lend America has a default rate eight times the industry average.

In a civil complaint filed last month, federal prosecutors alleged forty instances of fraudulent loans and accused Lend America of repeatedly inventing borrowers' income information to close loans.

Assistant United States Attorney Edwin Newman later told a federal judge that Lend America's mounting losses were "a loaded gun pointed against the FHA insurance fund."

Neither the company nor its attorneys replied to requests for comment from CBS News.

But in a court hearing last month, Lend America attorney Mitch Kider told the judge the most recent alleged fraud had occurred in May 2008 and the firm had since "revamped" its loan operations "from top to bottom."

"We going to make sure that Lend America and every other lender in America behave according to the standards that we expect," said Stevens, who had appointed the FHA's first chief risk officer. "If they don't they will be out of the system."

HUD Secretary Shaun Donovan may discuss further reforms when he testifies before the House of Representatives Financial Services Committee on Wednesday.

At 51, bus driver Steven Mitchell is trying to stay in the place he has called home since 2003. He has sought the help of the non-profit Rockaway Development and Rehabilitation Corporation to obtain refinance and a lower monthly payment.

"The longer it takes, the more I continue to fall behind," Mitchell said. "I'm a fighter; I'm not going to give up."

If he succeeds, he may avoid becoming another FHA foreclosure statistic.

FHA's reserve fund hits 7-year low

"The Federal Housing Administration, which has played a crucial role supporting American home buyers after the collapse of the mortgage market, has burned through a huge cash reserve in less than a decade and could soon wind up with what amounts to an automatic taxpayer bailout if the agency's fortunes don't improve, according to a review of FHA finances.

Senior FHA officials have assured Congress that the agency will not need a bailout, which would be politically sensitive for lawmakers to approve after the government has already spent hundreds of billions of dollars rescuing financial companies.

But the agency's complex funding mechanisms -- little understood in Washington, including on Capitol Hill -- do not require the FHA to turn to Congress if the agency cannot cover losses on its outstanding loans. The agency, which collects premiums from borrowers who take out FHA-insured mortgages, has been automatically drawing down on money it deposited with the Treasury Department when the FHA was flush with cash. Those funds have dwindled as the FHA's losses grew. If the losses continue unabated, the FHA would still receive money from Treasury.

"It is absolutely a myth that they would have to go to Congress for money," said Marvin Phaup, a former budget analyst at the Congressional Budget Office and now a budget expert at Pew Charitable Trusts. "The FHA has permanent authority to get money from the Treasury because it is backed by the full faith and credit of the federal government."

Below the threshold

The government is legally required to ensure that the balance in the FHA's emergency reserve fund does not drop below 2 percent of outstanding FHA loans. Over the past five years, starting during the years of the housing boom and continuing into the bust, FHA's reserves have tumbled and are now below that threshold, according to the agency.

Under a 1990 law, the FHA turns over to Treasury each year whatever excess money the agency expects to have left over after it pays losses on insured mortgages from what is known as the financing fund. The excess money is credited to the FHA's emergency reserve fund. In those years when the FHA underestimates its needs, it automatically gets an infusion from Treasury to make up the difference.

FHA officials say it is incorrect to consider these payments from Treasury as a taxpayer subsidy. The agency is in effect tapping money it previously parked with Treasury. But if losses on FHA-backed loans continue, the agency could find itself overdrawn, yet payments from Treasury would not stop. They would automatically continue, rescuing the agency with taxpayer money.

The FHA had been accumulating money ever since its emergency reserve fund was set up in 1992. The premiums collected by the agency from borrowers taking out FHA-backed loans regularly exceeded its liabilities. But the trend turned sour even as the housing market flourished. Leading up to the boom, private lenders started offering no-down payment and low-down payment mortgages to reasonably low-risk borrowers, effectively luring away some of the FHA's most reliable borrowers with less expensive loans.

"FHA could not compete as well for the best borrowers, and it was left with some of the riskier borrowers," said Mathew Scire, a director at the Government Accountability Office. Some of the loans left on FHA's books started going bad during the first half of this decade.

In each of the past seven years, the FHA has had to take money from its reserves to replenish the financing fund. In fiscal 2004, it transferred $7 billion in reserves -- a record high at the time -- to cover losses on loans from 1992 through 2003.

This recalculation prompted a study by the GAO, which attributed the reestimate to the FHA's financing of increasingly risky borrowers from 1995 onward as it lost ground to private lenders and loosened lending guidelines. Many of the losses were also attributed to a now-defunct program that encouraged defaults by allowing home sellers to help cover down payments for buyers.

As home prices fell, the downward trend continued. In fiscal 2009, when the agency recalculated its expected losses for loans made in previous years, it found it needed to transfer $10.3 billion from its reserves to its financing fund to cover losses, topping its previous record.

Then, when the housing market swooned and prices fell, many borrowers who suddenly owed more than their homes were worth fell behind on their mortgages. Defaults spiked. About 24 percent of FHA loans were in default in 2007 and 20 percent in 2008, according to the agency. The agency's reserves kept tumbling.

FHA's reserves were $10.04 billion as of June 30, the lowest level in nearly a decade, according to agency data. Seven years ago, the fund had twice as much cash. It remains in the black only because it has accrued interest.

More recent data, due to be released in an audit this month, will show that the reserve fund fell below the federally mandated level as of Sept. 30 for the first time since the fund was set up, agency officials recently said. The excess money in that fund is no longer enough to cover 2 percent of FHA's outstanding loans, as required by law.

This year's audit was scheduled to be released on Wednesday but FHA abruptly delayed it, citing problems with financial-stress tests it had requested that went "above and beyond" what the audit typically entails. Agency officials declined to detail the nature of these problems.

"I don't know what 'above and beyond' economic scenario testing FHA asked [the auditing firm] to do, but it's pretty easy to envision how a 'truly stressful' scenario would wipe out" the FHA reserves, said Thomas Lawler, an economist and housing consultant, in his newsletter last week.

FHA Commissioner David H. Stevens has said that the audit results will appear dire because they offer a snapshot of the agency's financial standing at the depths of a severe recession without taking into account new loans the FHA will insure or the fact that many of these loans have been made to more creditworthy borrowers than the FHA typically caters to.

Stevens also noted that the FHA's financing fund now has about $20 billion, with the reserves as a back-up.

But he said agency officials were watching the housing market to see if they have to rethink their calculations. "Any worsening economic downturn, beyond what's anticipated by the audit, could have a greater adverse impact to capital and would be reason for caution," Stevens said in an interview.

Covering future losses

Each year, the FHA estimates how much money it will need in its financing fund to cover future losses on all of its outstanding loans and how much, if any, will be left over. Adding up those annual estimates since 1992 shows that the FHA had over time projected its revenue from premiums would exceed costs by $33.8 billion, and this surplus would move into the emergency reserve fund.

But almost exactly the opposite happened. The FHA had to shift a total of $34.4 billion out of the reserve fund and into the financing fund to cover losses. If not for the interest it collected over the years, the fund would be $647 million in the hole, instead of $10.04 billion in the black, according to the agency.

A few budget policy experts say the interest payments mask the true cost of the FHA's mortgage-guarantee program. But other experts say accruing interest is legitimate and that several federal trust funds operate that way, such as the Social Security and the highway trust funds. They collect taxes from consumers and interest on those taxes.

"These trust funds were intended to have a dedicated source of revenues over time, and therefore it make sense to count interest," said James Horney, director of federal fiscal policy at the Center on Budget and Policy Priorities. "It's not phony accounting. If the contributions you put into a trust fund are not earning interest, then you don't build up an adequate amount to cover future needs."


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