House Collapse

Federal Housing Administration deep in the red

November 16, 2012

The Federal Housing Administration (FHA) today released the results of an independent audit showing that it is in dire financial shape.

The Wall Street Journal reported:

An audit released Friday that shows the Federal Housing Administration faces projected losses of $16.3 billion at the end of September prompted housing officials to announce a series of measures designed to avoid an injection of taxpayer funds.

"Even under generous accounting rules that no other financial entity gets to use, it is insolvent," wrote Ed Pinto, a housing expert at the American Enterprise Institute, today in an email. Pinto regularly sends out an email titled FHA WATCH.

"To make matters worse," he continued, "this report is already obsolete and outlines a conservative estimate of the true losses incurred by the FHA."

The report’s "base case scenario ignores the Fed’s September QE 3 announcement. FHA has once again ignored intervening events that dramatically change the base case findings in their annual report.  If the current low interest rate scenario were substituted, the FHAs FY 2012 is a negative $31 billion," he wrote.

Because the FHA is in the hole it may not be able to pay for its losses from delinquent loans, which would force it to turn to the Treasury for money to finance its losses.

The Journal wrote:

The FHA is required to maintain enough cash to pay for projected losses on the $1.1 trillion in loans that it guarantees. Last year, the independent audit said the FHA would have $2.6 billion after covering estimated losses.

But the latest forecasts show that while the FHA currently has reserves of $30.4 billion, it expects to lose $46.7 billion on the loans it has guaranteed, resulting in a $16.3 billion deficit.

The FHA does not issue loans directly but rather guarantees housing loans, along with Fannie Mae and Freddie Mac, the Journal said.

"Together with Fannie and Freddie, federal agencies are backing nearly nine in 10 new mortgages," it wrote.

Fannie Mae and Freddie Mac themselves have suffered financial trouble since the housing crisis, when the federal government took control of them.