Government Report Calls FHA “High-Risk” - The hits just keep on coming for the FHA!
A government oversight group has deemed the agency to be “high risk” in a new report. In fairness, the Government Accountability Office (GAO) declared several government agencies to be a high risk, but the FHA was at the top of their list. The GAO cited the FHA’s rapid growth in mortgage financing, as well as their limited amount of capital reserves, for putting them at the top.
For decades, the FHA has helped millions of Americans qualify for mortgages, most of whom sit in a lower income bracket, by insuring private lenders against losses on defaults. But thanks to the recent economic crisis, the FHA has played an even bigger role in the housing market. Because lenders have been wary of writing home loans without the FHA’s safety let, they have become almost a go-to source for Americans looking for mortgages. Now, however, the FHA is operating in the red itself, sparking watchdogs like the GAO to urge the agency to secure more funds for its reserve in case of another crisis.
This report is the latest headline for the FHA, and most of the agency’s time spent in the news lately hasn’t been for anything positive. The FHA recently made news when many experts believed the agency was destined for a government bailout. While the talk has died down a bit, it’s still a strong possibility.
Right now, the FHA is considered to be “high risk” because its reserves are below the required amount. In its announcement, the GAO stated, “Although required to maintain capital reserves equal to at least 2% of its portfolio, FHA’s capital reserves have fallen below this level, due partly to increases in projected defaults on the loans it has insured. As a result, we are modifying this high-risk area to include FHA and acknowledge the need for actions beyond those already taken to help restore FHA’s financial soundness and define its future role.”
Some question whether this “high risk” label is a little premature, since there is still quite a bit of money in the FHA reserves. In fact, some experts say that, after the disaster of Fannie Mae and Freddie Mac, people are exaggerating the risk level of the FHA. However, other experts say that fears over a possible bailout, coupled with a general sense of distrust in government agencies when it comes to the housing market, may be behind the “high risk” label.
The report couldn’t have come out at a worse time, though. Trust in the FHA is already low, and many people are beginning to question whether the agency is still even viable. Thanks to talks of a bailout in late 2012, Americans were already nervous about the FHA. This could send them over the edge.
So, what’s next for the agency?
The FHA is combatting these issues by doing a number of things designed to lower its risk. According to the GAO, the FHA “created a risk office in 2010 and hired a consultant to recommend best practices. FHA plans to charter committees to evaluate risks at enterprise-wide and programmatic levels.”
The FHA has also been attempting to produce more revenue while decreasing its risk, by increasing its underwriting standards and, just recently, raising its fees. The FHA hopes that by implementing these new practices, it will be able to avoid the need for a bailout and lower the number of borrowers who default on loans that it insures.
However, only time will tell if those measures actually work!
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