FHA’s Cash Reserves Fall Below Mandated Minimum Levels

The Federal Housing Administration [FHA] said Thursday that its cash reserves, which insure loans made by private lenders, have shrunk for the first time since 1994 to a point far below what is required by law. An independent audit designed to measure the agency’s financial health found the agency’s capital reserves to be at 0.53%, far under the 2% minimum mandated by Congress. A year ago, the capital reserves were 3%.

The FHA — considered a key backer for first-time homeowners and currently insuring more than 5 million mortgages — has never used taxpayer money to cover losses from its borrowing program, but if its reserves drop below zero, taxpayer money would automatically flow into that fund from the U.S. Treasury.

The results of the FHA’s annual audit showed the reserve fund had an estimated value of $2.73 billion as of Sept. 30, an 83% drop from the $15.82 billion that last year’s audit projected it would have by this time. The agency attributes the dramatic slide in its reserve fund to last year’s record drop in home prices and the rash of defaults that have plagued the sector.

Here are some excerpts from FHA’s annual audit:

“The independent study shows that FHA has sustained significant losses from loans made before 2009, and the capital reserve ratio has fallen below the congressionally mandated threshold, but concludes that under most economic scenarios considered FHA’s reserves would remain above zero.

FHA’s capital reserve ratio, which is determined through findings from the independent actuarial study, measures reserves held in excess of those needed to cover projected losses over the next 30 years. The review projects the capital reserve ratio to be 0.53 percent of total insurance in force this year, below the two-percent statutory threshold. This capital ratio fell from 3 percent in the fall of 2008, reflecting difficult conditions in the housing market. The 0.53 percent capital ratio (which represents the funds held in the Capital Reserve Account) is in addition to the auditor’s base case estimate of the 30-year reserves needed to pay for losses on existing loans (which are held in the Financing Account). Combining those two accounts, FHA holds $31 billion in its total reserves today, or more than 4.5 percent of total insurance-in-force.
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As part of its efforts to manage risk, FHA is modeling more extreme scenarios than those used by the actuary, including scenarios showing the reserves going below zero.”

emphasis added

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