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FHA In Trouble?

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Posted On: 12/04/2013

Question:

Since the Federal Housing Administration has a $1.7 billion reserve shortage, does that mean FHA mortgages may no longer be available?

Answer:

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As the non-partisan Congressional Budget Office explains, the answer is a flat "no."

There are three reasons the FHA program will continue:

First, the FHA is not out of money. It has $48 billion in cash on hand. It only has a "deficit" because of an accounting quirk created by Congress, which says it must have a 2 percent reserve to account for possible losses during the next 30 years.

The FHA had surpluses worth more than $20 billion between 2009 and 2012. It appears that the FHA will rack up another huge surplus this year. The problem is that losses from loans insured from 2000 through 2008 continue to plague the system.

Second, for years on end the FHA made financial transfers to the government – and no one complained. As then-FHA Commissioner Brian Montgomery told US News & World Report in 2008, "We normally, at the end of the day, have a surplus that we then give to the U.S. Treasury."

Third, the Department of Housing and Urban Development and the FHA – as well as Fannie Mae and Freddie Mac ¬– are now collecting billions of dollars in settlements from lenders who sold loans that allegedly did not meet program standards and are one reason for massive losses. Look for more settlements to come.

Fourth, if the FHA actually runs out of money the CBO says it will receive an "automatic infusion of funds from the general fund of the Treasury." This guarantee applies not only to the FHA but to all loan guarantees made by various federal agencies.

But don't worry – accounting experts say the FHA is expected to have a full 2-percent cash reserve by 2017. That's because old loans made between 2000 and 2008 are falling off the system, premium rates have gone up, lender suits are being settled, and mortgages insured since 2009 are profitable and create reserve surpluses.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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