FHA Finances will Rebound on Loan Volume and Higher Premiums

By Liz Clinger Updated on 8/10/2012

Analysts believe that the Federal Housing Administration will finish the fiscal year with $3 billion in reserves.  This is a direct result of FHA increasing their premiums and the growing loan volume offsetting shortfalls. 

U.S. Department of Housing and Urban Development (HUD) is pressing for a Senate vote regarding Carl Galante’s nomination to be in charge of the agency.  Galante has headed the agency since mid 2011.  Members of Congress have been informed through various HUD documents that Galante’s personal mission is to impact the way that the FHA and HUD interact, including risk-prevention for FHA.

In February, FHA was prepared to inquire for a $688 million taxpayer subsidy for the first time in 80 years.  The need was eradicated, however, when FHA won $1 billion in a legal settlement from mortgage servicers regarding flawed foreclosure practices. 

The reason why the agency is having so much trouble is because its role increased after the credit crisis in the housing market.  Now, FHA backs just over 7 million loans with a total outstanding balance of $1 trillion, three times the amount of the balance five years ago.

Republican Opposition

According to HUD documents, FHA has been benefitting from improving finances.  These documents are also encouraging the senators to vote in Galante before their summer recess.  Several Republicans oppose Galante entering the Senate due to the fact that FHA has shaky finances. 

David Stevens was the agency’s last permanent leader – he quit in the beginning of 2011 to head up the Mortgage Bankers Association.  Galante took his place after she served as the agency’s head of multifamily housing.

Since FHA raised single-family loan insurance premiums in April, premium revenues and loan volumes have shot up to 1.75% of loan amount (up by 75 basis points).  The agency also reduced up-front premiums in its streamline refinance program 0.01% of loan amount and slashed annual fees 0.55% down from 1.15. 

According to FHA’s data, single-family insurance applications rose to 124,000 in May, up 4.5% from last year at the same time.  This included a 225% increase (25,000) in streamline refinance applications.

The reason for the fees increase is due to a November audit showing that the agency’s reserves had dropped to $2.6 billion.  FHA’s capital ratio (measures the ability to withstand losses) was 0.24% in the year ending September 30.  This was the third year in a row that the agency didn’t meet the legal requirement of 2%.

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