Editor: David Reiss
Brooklyn Law School

February 22, 2013

The GAO’s Take on The FHA

By David Reiss

The Government Accountability Office issued an update to its 2013 HIGH-RISK SERIES.  It had this to say about the Federal Housing Administration:

a new challenge for the markets has also evolved as the decline in private sector participation in housing finance that began with the 2007-2009 financial crisis has resulted in much greater activity by FHA, whose single-family loan insurance portfolio has grown from about $300 billion in 2007 to more than $1.1 trillion in 2012. Although required to maintain capital reserves equal to at least 2 percent 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. One such action would be to determine the economic conditions that FHA’s primary insurance fund would be expected to withstand without drawing on the Treasury. Recent events suggest that the 2-percent capital requirement may not be adequate to avoid the need for Treasury support under severe stress scenarios. Additionally, actions to reform GSEs and to implement mortgage market reforms in the Dodd-Frank Act will need to consider the potential impacts on FHA’s risk exposure. (25)

Discussion about the FHA is getting in high gear, in large part because of Ed Pinto.  I expect to take up the issue of the FHA’s appropriate role in the housing market over the coming months and will offer an alternative vision to his.

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