FHA's mortgage insurance reserves have dropped far below congressionally-mandated levels, but the agency still has enough of a financial cushion to handle all expected loan losses for the next 30 years, with a multi-billion dollar surplus beyond that.

Put another way: There should be no need for congressional appropriations or a Treasury bailout of FHA, and no need for sharp cutbacks in the availability of FHA financing for first-time buyers and individuals with credit issues.

That was the upbeat message last Thursday from HUD Secretary Shaun Donovan and FHA Commissioner David Stevens, who held a special briefing on the agency's politically-sensitive annual financial audit.

As expected, in the wake of the housing price bust, rising unemployment and delinquency levels, FHA's reserves have dropped below the 2 percent minimum required by Congress. As of September 30, the reserve fund ratio stood at 0.53 percent -- down sharply from a 3 percent reserve position a year ago.

During the past several years, FHA's market share has jumped from barely 2 percent in 2005 to upwards of 30 percent this year. At the same time, however, its delinquency ratios on loans originated during 2007 and 2008 have increased sharply -- and have drawn scathing criticism from some Capitol Hill Republicans who think the agency is too lenient on borrowers and its network of lenders.

Both Donovan and Stevens acknowledged the rising levels of loan losses, but argued that the current year book of business, with average FICO scores close to 700 points to lower credit losses in future years.

Nonetheless, said Stevens, “there are real risks (in the economy) and we are addressing those risks with real reforms,” particularly through much tougher standards for FHA approved lenders, and more severe penalties for lenders who send FHA poorly underwritten loans to insure.

Meanwhile last week in a an unusual circling of the wagons, 16 housing, mortgage and consumer groups sent a joint letter to the House and Senate urging members to refrain from making any “unnecessary changes or restrictions” on FHA -- for example, requiring higher insurance premiums to consumers or higher downpayments -- that could cut the availability of low-downpayment, affordable mortgage financing for home buyers and refinancers.

The groups ranged from the Consumer Federation of America and the Center for Responsible Lending on the one hand to the Mortgage Bankers Association on the other, lobbies that often are not on the same page when it comes to home lending issues, but who are united when it comes to protecting FHA.

Published: November 16, 2009

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consumer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.