If housing prices fall in 2012 the way they did in 2011, taxpayers might have to pour billions into the Federal Housing Administration (FHA), according to the Government Accountability Office (GAO), to bail out the world’s largest mortgage insurer.
“[A] weakening in the performance of FHA-insured loans has heightened the possibility that FHA could require additional funds to help cover its costs on insurance issued to date,” Mathew J. Scirè, GAO director of Financial Markets and Community Investments, told the House Committee on Financial Services. “If house prices were to decline in 2012 by an amount rivaling that of 2011, [FHA] loans would not be expected to generate sufficient net receipts to offset any potential decline in value,” he added.
Scirè described one scenario in which the FHA “may require $13 billion in assistance from Treasury to ensure the financing account had sufficient loss reserves.”
Housing and Urban Development (HUD) Secretary Shaun Donovan acknowledged such a possibility in his testimony today. “Significant further declines in home prices could create a situation in which the current portfolio would require additional support,” he said, although he argued that such a development is unlikely. “Only if conditions worsened substantially would the losses exceed amounts available in the [Mutual Mortgage Insurance] MMI Fund next year. ”
Scirè indicated, on the other hand, that HUD and FHA have too optimistic a view of the housing market, and thus of the likelihood that a bailout will have to be necessary. “The current [actuarial] methodology is significantly limited by its reliance on a single economic forecast,” he explained. “As a result, baseline estimates of the capital ratio may tend to underestimate insurance claims and mortgage prepayments and therefore may tend to overestimate the Fund’s economic value.”
He also criticized FHA’s risk management strategy, which he said was not comprehensive and was not fully implemented. “All these factors limit FHA’s effectiveness in identifying, planning for, and addressing risk,” he said.
Donovan said that “HUD has taken to strengthen the MMI Fund via policy, process, and organizational changes,” in addition to investing in improved information technology.
