The report, required by Congress, estimates that the agency will have completely exhausted its capital reserves. FHA is required to keep a capital reserve balance of two percent of the value of its mortgage insurance business – currently valued at $1.1 trillion. However, the actuarial report released Friday showed that that balance will be -1.44 percent, meaning that the FHA will not have sufficient fund to cover future losses.
The report also showed that the FHA continues to operate at a loss, failing to earn enough in premium revenue to offset losses from its insurance business. If FHA were a private company, it would effectively be insolvent and could face a government takeover or bailout like insurance giant AIG did in 2008. However, FHA has unlimited authority to draw funds from the Treasury, so if it needs to, it can simply bail itself out – something that has never happened in the agency’s 78-year history.
No decision has been made yet on whether or not FHA will use its bailout authority. That decision won’t be made until President Obama drafts his 2013 budget next year. To return the agency to fiscal solvency, the administration may decide to increase the fees FHA charges lenders to insure loans, increasing its premium revenue in an attempt to keep its capital reserves out of the red. Last year, FHA’s capital reserve ratio stood at 0.24 percent as the agency posted a net worth of just $2.6 billion despite insuring $1.1 trillion in home loans.
FHA does not make home loans directly. It insures banks and other lenders against losses, allowing them to take as little as a 3.5 percent down payment. In the report, the auditors pointed to three factors driving FHA’s deteriorating financial conditions: losses stemming from FHA’s expansion during the housing crisis, continued low interest rates, and changes to how the actuary estimates losses on FHA’s business.