FHA Reportedly Concealed $115B Loss Scenario: Issa

Federal Housing Administration

Federal Housing Administration (FHA) could face losses of up to $115 billion over 30 years under severe economic circumstances, according to an undisclosed ‘stress test’ conducted last year.

Federal Housing Administration FHA

The federal mortgage insurer however reported in its last annual audit that, under current conditions, FHA’s projected losses over 30 years could exceed its reserves by $13.5 billion.

White House Budget Team estimated FHA loss at $943 million

FHA reported in October that losses on defaulted loans could force the federal mortgage insurer to seek tax payer aid up to $16.3 billion. However White House budget writers pruned the estimated loss to $943 million in their April budget plan owing to improvement shown by the housing market.

Darrel Issa,chairman of the House Committee on Oversight and Government Reform, said in a May 29 letter that the October report deliberately omitted a projection performance done by FHA’s independent actuaries that showed the loss at $115 billion under extreme scenario.

FHA’s outside actuaries modeled their analysis along the lines of the annual stress test employed by the Federal Reserve Board. This model measures how the nation’s largest financial institutions would fare in the event of a significant economic shock.

Incidentally the FHA isn’t required to use the Fed test.

FHA doesn’t provide loans directly to borrowers; instead it insures lenders against losses on mortgages that meet its standards. FHA is required to maintain enough cash to pay for projected losses on all loans it insures.

FHA guarantees mortgages to borrowers who can make down payments of as low as 3.5 percent. Such loans are not supported by private lenders without a government guarantee.

FHA credit bucket has improved in recent years. FHA home purchasers had average scores of 700.

FHA insures mortgages worth $1.1 trillion and backs about 15 percent of the U.S. home loan originations. Its share was just 4 percent during 2007.

Between 2007 and 2009, FHA enhanced its business as private capital was not forthcoming. Out of the $115 billion shortfall reported, about $70 billion is represented by the loans backed from 2007 to 2009.

A spokeswomen from the Department of Housing and Urban Development, which overseas FHA has indicated that they are examining the matter and would respond to the committee appropriately.

Darrel Issa,  chairman of the House Committee on Oversight and Government Reform, remarked that FHA’s non-disclosure is troubling and sought views from FHA’s commissioner Carol Galante.

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About the Author

Mani is a Senior Financial Consultant. He has worked in Senior Management role in large banking, financial and information technology organizations. He has provided solutions for major banking and securities firms across the globe in the area of retail, corporate and investment banking. He holds MBA (Finance) and Professional Management Accounting Qualifications. His hobbies are tracking global financial developments and watching sports

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