Oct. 7 (Bloomberg) -- The Federal Housing Administration, the U.S. agency that insures mortgages with low down payments, faces $54 billion more in losses than it can withstand, a former Fannie Mae executive said.
“It appears destined for a taxpayer bailout in the next 24 to 36 months,” said Edward Pinto, a consultant who was chief credit officer from 1987 to 1989 for Fannie Mae, the mortgage- finance company that is now government-run, in testimony prepared for a House committee hearing in Washington tomorrow.
The FHA program’s volumes have quadrupled since 2006 as private lenders and insurers pulled back amid the U.S. housing slump, a trend Pinto said has left it backing risky loans and exposed to fraud in a “market where prices have yet to stabilize.” The program insures loans with down payments as low as 3.5 percent and has no formal credit-score requirements.
FHA Commissioner David H. Stevens, who will also speak tomorrow, said last month that falling prices would push its single-family fund’s reserves below a 2 percent cushion required by Congress. “Under no circumstances will a taxpayer bailout be needed” because the shortfall will be cured over time, he said.
Brian Sullivan, a spokesman for the Housing and Urban Development Department, which oversees the FHA, declined to comment today.
The idea the FHA needs a rescue is “just plain wrong,” Stevens said in an Oct. 6 letter to the Wall Street Journal. That’s in part because the FHA’s accounting method mean its reserves are enough to cover more than 30 years of projected losses, assuming no revenue from new business.
FHA’s total reserves exceed $30 billion, or more than 4.4 percent of its insurance, according to Stevens. The loan- insurance ratio, which compares the reserves with the loans insured, was 6.4 percent a year ago, according to government data.
The agency said last month it would tighten some credit, appraisal and lender standards and appoint a chief risk officer. In the first half of the year, FHA insured more than $178 billion of new mortgages, or about 19 percent of the total, according to the newsletter Inside Mortgage Finance.
Official figures on FHA’s reserves as of Sept. 30 won’t show a shortfall when released because “the assumptions used will be overly optimistic relative to loss mitigation resulting from both loan modifications and recent and expected underwriting changes,” Pinto said.