With the presidential race entering the homestretch, most of the political world is wondering: Will there be an “October surprise”? But this year the real surprise may come in November, when the American people learn about the need for a taxpayer-funded bailout of the Federal Housing Administration (FHA).
The FHA guarantees mortgages on loans made by FHA-approved lenders throughout the United States and insures mortgages on single-family homes. Traditionally, it has participated in a fairly small segment of the overall mortgage market. In 2006, the FHA’s market share was just 5 percent. But as credit availability tightened and underwriting standards became more exacting, the FHA’s share of the market exploded to 30 percent of all new mortgage loans. Why is this significant to taxpayers? Unlike the case with conventional loans, when an FHA borrower defaults on his mortgage, the American taxpayers have insured 100 percent of the value of the loan and will be forced to cover any losses on it.
The FHA’s increased market share has not been a good thing for taxpayers. One-sixth of all FHA loans were delinquent as of August 2012. This translates to over 1.2 million borrowers who have missed at least one payment. Even more ominously, 58 percent of the delinquent loans were “seriously delinquent,” which means that almost 10 percent of all FHA borrowers had missed three consecutive months of payments or are now in foreclosure.
These and other facts undermine reports that the housing market has finally turned a corner. Claims on defaulted single-family loans have been steadily rising over the past four quarters. What’s more, the FHA’s insurance fund paid $5.3 billion in claims in the third quarter of fiscal year 2012. As a result, the FHA’s cash flow has turned negative. Remember, you, the taxpayers, are ultimately the FHA’s insurance fund. You paid out $5.3 billion in claims this quarter, and you now have a negative cash flow. You and your housing fund are broke, and no one even bothered to tell you.
But wait, there’s more. Tucked away in President Obama’s 2012 budget proposal was a little-noticed provision telling Congress that it may need to provide $688 million to cover the FHA’s projected losses this fiscal year. Translation: The FHA will need a bailout for the first time in its 75-year history. Since that proposal came out, the Department of Housing and Urban Development (HUD), which oversees the FHA, has announced a hasty $1 billion settlement with Bank of America for alleged mortgage-market violations. This provided HUD with a Band-Aid to cover the FHA shortfall through October 2012. But the problem has not been solved, merely postponed. Below the radar, FHA is still hemorrhaging money from loan losses. For obvious political reasons, the Obama administration wants to keep a lid on this looming crisis. They just need to keep it quiet for another month before they have to announce the bad news in mid-November — after the election, of course.
According to an estimate from the American Enterprise Institute, the FHA’s capital shortfall is $46 billion to $65 billion under its legally mandated 2 percent minimum capital requirements. Without a cash infusion, it will not be able to pay future claims as they come due. Consequently, the FHA will have to go hat in hand to Congress and ultimately the American taxpayers.
Many taxpayers howled when TARP funds were used to bail out the big banks and Wall Street. Bank of America received two tranches of TARP funds in 2008 and 2009, totaling $45 billion. Since then, it has repaid the American taxpayers in full. Unfortunately, when the FHA gets its bailout, the taxpayers have no chance of being repaid, and worse yet, the FHA likely will be back for more.
With all of Washington focused on the impending fiscal cliff, the FHA’s problems have been either overlooked or obscured. But the bill will soon come due and there will be no escaping it. As the country teeters on the edge of that cliff, Obama’s November surprise just may be the shove that sends us over the edge.
— Dan Murphy is general counsel at the BGR Group in Washington, D.C. He served as chief of staff at the Department of Housing and Urban Development in 2001–02.