The Federal Housing Authority Is In Trouble

Well this isn't good. The Federal Housing Authority's (FHA) cash reserves are well below the minimum amount required by law -- and are in danger of drying up completely. A little over a month ago, I speculated that the FHA might be next in line for a bailout. Today's news makes that outcome appear even more inevitable.

Here's a little detail from the Washington Post:

The reserve fund, which holds excess cash beyond what the agency needs to cover future losses on its outstanding loans, had an estimated value of $3.6 billion as of Sept. 30, an sharp drop from the $15.82 billion that last year's audit projected it would have by this time.

The $3.6 billion value represents 0.53 percent of the mortgages insured by FHA, well below the 2 percent ratio required by law and the 3 percent ratio maintained by the fund at the same time last year.

In other words, if the portfolio of mortgages for low income borrowers that the FHA insures loses more than 0.53%, then the FHA will need a bailout. Meanwhile, unemployment -- now at 10.2% nationally and expected to hover in or near double-digits throughout 2010 -- is now driving foreclosures. I think it's pretty easy to see how this one will turn out. Lucky for the FHA:

If FHA's reserves drop below zero, FHA taxpayer money would automatically flow into that fund from the U.S. Treasury.

Unlike Fannie and Freddie, the FHA is already fully guaranteed by the U.S. government, so Uncle Sam's got it covered. It's hard to know just how much money the FHA might eventually need, because it depends on what how bad a loss scenario it will ultimately face. Its portfolio's size is around $675 billion, and it has around $31 billion in capital to cushion those losses (including the loss reserves mentioned above and its financing fund), which has 4.5% of its portfolio covered.

But just for fun, here's a simplified version of the FHA's potential cost to taxpayers, based on various portfolio loss scenarios and the data above:

FHA Loss Scenarios 2009-11.PNG