THE BIG QUESTION: Will Federal Housing Administration (FHA) be the Next Agency to be Bailed Out by Taxpayers?

THE BIG QUESTION: Will Federal Housing Administration (FHA)  be the Next Agency to be Bailed Out by Taxpayers?

We haven't heard much lately about the Federal Housing Administration (FHA), the nation's oldest housing agency, but Octavio Nuiry of RealtyTrac writes under the headline:

"Presidents 2014 Budget Foresees $943 Million FHA Bailout" (See link below) that "The Obama administration’s proposed fiscal budget for 2014 estimates that the cash-strapped Federal Housing Administration (FHA) will need a $943 million taxpayer bailout this year to cover losses from shaky loans the agency insured as the housing  market collapsed in 2007."

Nuiry writes that "This would be the first such bailout in the 80-year history of the FHA" and continues: "Last fall, concerns about the FHA’s finances increased when an independent audit found that the agency, which has more than $1 trillion worth of loans in its portfolio, had burned through it capital reserves because of bad  mortgages, and would need up to a $16.3 billion infusion of cash from the Treasury."


The National Housing Act of 1934 created the Federal Housing Administration. Its intent was to regulate the rate of interest and the terms of mortgages that it insured.  The agency also established the present system of long-term amortized home loans, in place of the short-term loans with balloon payments that had prevailed before.

Lawmakers are split along party lines about how to overhaul the FHA, Nuiry says. The likelihood that the agency would need a taxpayer bailout  drew sharp criticism from House Republicans, including Jeb Hensarling (R-Texas), chairman of the House Financial Services Committee, who claims the government’s role in the housing market should be dramatically reduced.


“If the FHA were a private financial  institution, likely somebody would be fired, somebody would be fined or the  institution would find itself in receivership,” said Hensarling. “Instead, the FHA is merrily on its way to becoming the recipient of the next great taxpayer bailout. It’s outrageous.”


Democrats said the agency must be allowed to preserve the affordable home loans it provides to first-time homebuyers and  minority communities.


“FHA, while still under stress from  legacy loans, has made significant progress and is on a sound fiscal path forward,” said Carol  Galante, the FHA Commissioner. “We are continuing to act and do everything possible to ensure that these legacy loans are corrected.”


The FHA is a major source of funding for first-time home buyers and people with modest incomes. It backs $1.1 trillion in loans.


“The performance of FHA loans is mixed,” said Jay Brinkmann, MBA’s chief economist and senior vice president of research in a written statement. “While the foreclosure starts and foreclosure inventory percentages both fell, the delinquency percentages generally remained flat or increased slightly, particularly the  percentage of loans 90-days or more past due. However, 44 percent of the FHA loans that are seriously delinquent were made in the years 2008 and 2009, while loans made in those years represent a smaller share of FHA’s overall book of  business.”  


A report by the Government Accountability Office (GAO)  (link: found that 
"The Department of Housing and Urban Development's (HUD) Federal Housing Administration (FHA) faces financial and risk-management challenges. For the fourth straight year, capital reserves for FHA's Mutual Mortgage Insurance Fund are below the statutory minimum. Also, declining balances in the fund's capital reserve account have heightened the possibility that FHA will require additional funds to have sufficient reserves for all future insurance claims on its existing portfolio. Further actions could help to restore FHA's financial soundness. For example, GAO previously concluded that Congress or HUD needs to determine the economic conditions the fund would be expected to withstand without drawing on Department of the Treasury funding. With regard to risk management, FHA has made or plans improvements. For example, FHA implemented an initiative in 2009 to strengthen internal controls and risk assessment for single-family housing and created a risk office in 2010. However, FHA has only recently begun to integrate these activities and conduct annual risk assessments in accordance with HUD guidance. Without integrated and updated risk assessments that identify emerging risks, as GAO recommended, FHA lacks assurance that it has identified all its risks."


The GAO report adds that "Congress and HUD have taken steps to limit cost increases in the Housing Choice Voucher (voucher) program while maintaining assistance for existing program participants. Nonetheless, between 2003 and 2010, program expenditures grew about 9 percent (after adjusting for inflation), mainly due to rising rents, declining household incomes, and decisions to expand the number of assisted households. GAO identified options that, if implemented effectively, could reduce the need for new appropriations, cut expenditures, or increase the number of households assisted. These options include (1) reducing the subsidy reserves (unspent funds) of state and local housing agencies that administer the program, (2) streamlining administrative requirements, and (3) implementing rent reforms and consolidating voucher administration. These options would also involve trade-offs, such as higher rent burdens for low-income households.


Opportunities exist to improve how HUD evaluates and monitors the Moving to Work (MTW) program, which is intended to give state and local housing agencies flexibility to design and test innovative strategies for providing housing assistance. HUD's guidance does not specify that performance information collected from participating housing agencies be outcome-oriented, and HUD has not identified performance indicators for the program. In addition, HUD has not developed a systematic process for identifying lessons learned from the program, which limits HUD's ability to promote useful practices for broader implementation. HUD also has not taken key monitoring steps set out in internal control standards, such as issuing guidance that defines program terms or assessing compliance with all the program's statutory requirements. As a result, HUD lacks assurance that agencies are complying with statutory requirements. Also, without more complete information on program effectiveness and compliance, it will be difficult for Congress to know whether an expanded MTW program would benefit additional agencies and the residents they serve. Consistent with GAO recommendations, HUD has begun to revise guidance on MTW performance reporting.

Why GAO Did This Study

HUD operates programs that provide mortgage insurance to homebuyers and subsidize the rents of low-income households. In recent years, HUD's FHA has experienced dramatic growth in its insurance portfolio. Expenditures for HUD's rental voucher program also have risen substantially. Through the MTW demonstration program, HUD has sought to reduce costs and achieve greater cost-effectiveness in federal expenditures for rental housing.


This testimony discusses (1) the financial condition of FHA's insurance fund and FHA's risk management, (2) the costs of the voucher program and options to increase its efficiency, and (3) HUD's efforts to evaluate and monitor the MTW program.


This testimony draws from GAO reports on FHA's insurance fund and oversight capacity (GAO-10-827Rand GAO-12-15), HUD's voucher program (GAO-12-300), and HUD's MTW program (GAO-12-490). GAO also reviewed updated information on the insurance fund and voucher subsidy reserves as of the end of 2012.


GAO has made a number of recommendations to improve FHA's risk management, and FHA has taken some actions. GAO also recommended that HUD consider proposing to Congress options for improving the efficiency of the voucher program. HUD neither agreed nor disagreed and has not yet proposed such options. In addition, GAO recommended that HUD improve MTW information and monitoring. HUD partially agreed with these recommendations and has taken initial steps to improve performance data.   (

Comments powered by Disqus