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05 Dec 12 Mortgage Lending in 2013 with FHA Loan Programs

Margaret Chadbourn wrote an article for Reuters in which she considered the state of lending with the Federal Housing  Administration. The U.S. Federal Housing Administration, facing a $16.3 billion deficit, will increase home loan fees next year and take other steps in an effort to avoid a taxpayer bailout, the Obama administration said on Friday.

  • Obama administration to raise fees for FHA loans in 2013
  • FHA asking Congress for new tools to bolter insurance fund
  • FHA to sell more distressed loans and expand short sales
  • Agency won’t speculate on whether bailout can be averted

The agency, a primary source of funding for first-time home buyers and those with modest incomes, said it would raise the premiums it charges on loans it guarantees by 10 basis points, adding, on average, about $13 per month to a borrower’s cost. A basis point is one-hundredth of a percentage point.

Housing officials would not say whether the steps would be enough to keep the mortgage insurer from turning to the Treasury Department for a cash infusion for the first time in its 78-year history. “I’m not going to place bets,” FHA Acting Commissioner Carol Galante told reporters. The FHA’s role in the mortgage market has expanded rapidly since the U.S. housing bubble burst. It now insures about 1.2 million mortgages, supporting about 15% of all U.S. home loans, up from 5% in 2006. Combined with government-controlled Fannie Mae and Freddie Mac (FMCC.OB), which buy loans and repackage them as securities for investors, Washington’s footprint in the market has grown to account for nearly nine of every 10 mortgages. FHA still approves cash out loans with bad credit with only 15% equity as long as the borrowers has other strong credentials.

The three firms have helped prevent a deeper housing bust, but heavy losses have sparked debate over how to strike the best balance between protecting taxpayers and keeping credit flowing. An independent audit delivered to Congress on Friday showed the FHA had depleted the capital it would need to cover expected losses on the $1.1 trillion in mortgages it backs. It said the losses would leave the agency $16.3 billion in the red. “FHA is in dire need of restructuring,” said Cliff Rossi of the University of Maryland’s business school, who has worked at Fannie Mae, Freddie Mac and Citigroup. “The latest report highlights the broader issue surrounding housing finance and how much of a guarantee the government should provide and to whom.”

The FHA’s troubles stem from rising defaults on mortgages it guaranteed from 2007-2009 as the housing bubble was deflating. The audit projected those losses would amount to $70 billion. Galante emphasized that the White House’s annual budget proposal in February would be instrumental in determining whether the agency would need taxpayer funds by the time its fiscal year expires on Sept. 30. Any final determination would not be made until September. While officials stressed that a bailout is not a foregone conclusion, critics of the agency — including some lawmakers — are concerned it could turn out to be a burden on taxpayers along the lines of mortgage finance companies Fannie Mae and Freddie Mac, which have been propped up by more than $135 billion in funds from the U.S. Treasury. Senate Banking Committee Chairman Tim Johnson said he was “deeply concerned” by the state of the FHA’s finances and urged officials to “do everything in their power to protect taxpayers and restore its capital reserve” to the level required by law. The FHA is mandated to maintain a 2% capital ratio, which is a gauge of its ability to withstand losses, but it has not met that target for four years. The audit found the ratio had dropped to negative 1.44%.  Read the original Reuters update on FHA lending.

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