A report by Nick Timiraos of the Wall Street Journal highlights the risks associated with mortgages originated by the Federal Housing Administration (FHA), part of the Department of Housing and Urban Development HUD). The FHA acts as an insurer on loans originated by FHA designated lenders and funds itself on insurance fees it charges those lenders for its guarantee.
The FHA program was created in 1934 during the Depression as a means of encouraging housing demand. The program targets lower income borrowers and typically requires lower down payments, as low as 3.5% of the purchase price.
According to the Journal, as of September, the FHA guarantees $1 trillion in loan balances with net reserves of $2.8 billion against that total. Gross reserves total $31.7 billion but almost $29 billion has been set aside against anticipated losses. That works out to a margin of less than 0.3% net of projected losses. Any further decline in real estate prices would obviously put the FHA in the red.
The HUD website states: "FHA is the only government agency that operates entirely from its self-generated income and costs the taxpayers nothing". I have a bridge I would like to sell you.
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