The Federal Housing Administration (FHA) is the oldest government backed lender in the U.S. It began as part of the New Deal in 1934. Its earliest mission was to provide loans to those denied by traditional financial institutions, but were still deemed "credit worthy." The goal of the FHA was to create better neighborhoods, living conditions and boost the economy by helping more Americans become homeowners. (To learn more, check out The FHA's Minimum Property Standards.)
TUTORIAL: Mortgage Basics
During the housing bust that began in 2008 and 2009, the FHA picked up many pieces of the aftermath by offering loans to those who were facing foreclosure with their private lenders an option to refinance. With a White House plan called Making Home Affordable (MHA), the FHA offered substantially low interest rates, with minimum down-payments and even allowed first-time homebuyers to use the $8,000 tax rebate as their down-payment. Statistically, those who borrow with down-payment assistance have a higher rate of loan default, and the default rate currently faced by the FHA is up 76% from just a year ago.
While the rebate and MHA program was an economic lifesaver for many homeowners, it has, according to recent reports from the New York Times nearly bankrupted the FHA.
The FHA insures 5.4 million mortgages worth nearly $675 billion, it grants nearly 6,000 loans a day. Of those, 411,000 are in default. The most recent loans are in default at much higher rates than the older loans. Many FHA loans are being given on homes that are not equal to the value of the loan. In other words, they are "underwater" at the time of sale.
Even the Inspector General of Housing and Urban Development, Kenneth Donohue, who oversees the FHA, said the lack of reserves with which the FHA was operating as a "flashing red light;" urging the agency to take the situation more seriously. (For related reading, see Soaring Mortgage Defaults May Kill The Housing Recovery.)
Homeowners in Peril
Without the FHA, many potential homeowners will have nowhere else to turn. With credit histories being heavily scrutinized and banks now beginning to require 20% down payments, there are fewer Americans that will be able to afford homes.
Even current homeowners who have lost their jobs and are seeking refinancing won't be able to go through private lenders, as their loan standards would today eliminate them from obtaining a refinance loan.
For many who have fallen on difficult times, others who need relief from their current payments, young families venturing into home ownership for the first time and numerous other American's will be closed out of the housing market or will face eviction if the FHA goes bankrupt.
In hard hit economic areas, FHA loans are the only ones real estate agents are seeing, and the only reason homes are selling in those areas. Without them, there would virtually be no real estate market.
If the current economic situation continues to decline and the unemployment rate continues to rise, there will likely be additional foreclosures. Even if the FHA does avoid bankruptcy, it might have to reevaluate its loan standards. This could mean higher down-payments, more stringent credit standards and fewer dollars for those eligible to borrow. Either way, many potential homeowners and buyers will be eliminated from the housing market. (For more check out Who's Most Likely To Be In Debt In 2012?)
Taxpayers Paying the Tab
Of course, the ones who will be feeling the crunch the most are the taxpayers. The FHA is a government funded entity, and as such it is completely funded by U.S. taxpayers. Its loans are guaranteed through the Government National Mortgage Association (Ginnie Mae). Being part of Ginnie Mae means that if the FHA does goes broke, taxpayers are responsible for paying those investors that own Ginnie Mae bonds.
If the current market drops, if thousands of FHA borrowers continue to default and if standards for loan applicants aren't raised, it is the taxpayers who will bear the burden, probably with increased taxes.
The FHA has what is known as, "permanent and indefinite" budget authority. This means that Congress does not have to authorize a request for funds for the agency – they have the authority to bypass Congress for any additional funding, leaving the taxpayers with few options to object to another bailout.
The Bottom Line
The FHA has enabled many Americans to become homeowners that would otherwise never have been provided loans by private institutions. The agency has taken a few steps to help bolster its finances – decreasing the limit of backed loans from $729,750 to $625,500, and has tightened some loan standards.
The FHA also claims it is still operating in the black, bringing in more revenue than it expends. While this may be true, reports indicate that it is teetering on a financial precipice that with the current economy could send them easily into the bankrupt category.
For homebuyers, the only advice would be to save as much as possible, even if that means putting off purchasing a home for a year or two. Loans from private banks and institutions are already requiring an increased down-payment, and if the economy doesn't rebound soon, the FHA will be obligated to follow suit. (For additional reading about mortgages, read Requirements For A Post-Housing-Bust Mortgage.)
InsuranceA force majeure clause frees both parties in a contract from fulfilling their obligations in the event of some catastrophic or unexpected occurrence.
Credit & LoansAn equated monthly installment is a fixed payment a borrower makes to a lender on the same date of each month.
ProfessionalsFind out about some of the best documentaries that finance professionals can watch to gain a better understanding of their industry.
Home & AutoGoing in with friends to buy a vacation home will save you on the mortgage and expenses. But if there's conflict, it could end up costing your more.
Home & AutoUnderstand what makes London such a desirable place to live and why it is so expensive. Learn about the top five most expensive neighborhoods in London.
Home & AutoFinancial experts will argue that there’s no problem with allocating 50% of your net income to housing, but that barely leaves enough money for living comfortably. Reducing housing expenses to ...
Investing BasicsThe tiny house movement throws all assumptions about household budgeting and mortgage management out the window, and creates new market segments too.
InvestingWhile saving up for a down payment, where should you keep your money. A bank? The stock market? It all depends on your timeline.
Credit & LoansWhen buying a house, avoid nasty surprises by asking the right questions about your mortgage lender's qualifications and the mortgage process.
Home & AutoUnderstand why Manhattan has some of the priciest residential real estate in the world. Learn about the top four most expensive neighborhoods in Manhattan.
You can borrow from your annuity to put a down payment on a house, but be prepared to pay an assortment of fees and penalties. ... Read Full Answer >>
Once you reach 59.5, you can use the funds in your 401(k) retirement savings account to buy a house or any other expense ... Read Full Answer >>
Under the standard regulations for 401(k) retirement savings plans, you may elect to withdraw funds from your 401(k) for ... Read Full Answer >>
Anyone who has ever tried to purchase or sell a home has probably heard a lot about the property's fair market value, or ... Read Full Answer >>
In economics, a negative externality happens when a decision maker does not pay all the costs for his actions. Economists ... Read Full Answer >>
According to the Bureau of Economic Analysis, or BEA, disposable income is the amount of money an individual takes home after ... Read Full Answer >>