Loan Modification

Nope, No FHA Bailouts Allowed

By Peter G. Miller

For some time there have been loud worries that if the FHA defaults then taxpayers will have to bailout the program. Now, officially, the government says this can’t happen.

The new 2010 FHA Reform Act says the FHA is bailout-proof.

The very last item in the bill is Section 26 which tells us there is now a “Prohibition on Taxpayer Bailout of FHA Program.”

This is an absolute bunch of nonsense. Let me explain why.

Reserves & Profits

To have a bailout of the FHA program the program must first fail. At this writing the FHA is doing very well, thank you.

For instance, in fiscal 2009 the FHA reserve fund for forward mortgages grew. HUD reports that the ?FHA?s capital resources have grown from $27.2 billion at the start of the year, to $30.7 billion at year?s end. That represents an overall capital-resource ratio against outstanding loan guarantees of 4.5 percent. The increase in capital resources is primarily due to premium revenues collected on new insurance in FY 2009. FHA collects a significant share of total premium revenues at the time of insurance endorsement, and FY 2009 yielded a record volume of new insurance commitments.?

Also, there is the little matter that the FHA expects a $6 billion profit in fiscal 2011.

However, there are huge worries about the FHA loan program. Some people figure that if the private sector is having such a rough time then surely the FHA is also in trouble. And, in truth, a tough economy impacts all players, including the FHA.

Now, let’s say that you’re an elected official. You know that worries about the instant and immediate failure of the FHA mortgage plan are not buttressed by reality. But you also know that things could stay the same or perhaps get worse and that some of your constituents are seriously worried about a taxpayer bailout for the FHA — though not for big banks or Wall Street.

So you have a chance to vote for an FHA bailout prohibition. It’s a voice vote. Now you have the perfect political position. On one hand in an act of caution you have voted to prevent the use of taxpayer money to help the FHA. On the other you know full well that the FHA is unlikely to need such help and that the program has been sustained by borrower insurance premiums for decades. Therefore, no bailout is in the cards.

The people who worry about the failure of the FHA, or who want it, will love you. The people who don’t worry about the FHA going under won’t care.

Everyone is happy, the way voters ought to be….

The actual language from the bill is below.

PROHIBITION ON TAXPAYER BAILOUT OF FHA PROGRAM

Section 205 of the National Housing Act (12 U.S.C. 1711), as amended by the preceding provisions of this Act, is further amended by adding at the end the following new subsection:

(h) Taxpayer Protection- The Secretary shall use all available actions and methods authorized under law to ensure compliance with subsection (f)(2) and to protect the taxpayers of the United States from financial responsibility for any obligations of the Fund, including authority to increase insurance premiums charged under this title for mortgages that are obligations of the Fund, authority to establish more stringent underwriting standards for such mortgages, and authority to increase the amount of cash or its equivalent required to be paid on account of the property subject to such a mortgage.

Full post as published by FHA Mortgage Guide on June 22, 2010 (boomark / email).