WSJ: Loan losses spark concern over FHA

A must-read in tomorrow’s WSJ talks about the solvency crisis facing FHA:
The Federal Housing Administration, hit by increasing mortgage-related losses, is in danger of seeing its reserves fall below the level demanded by Congress, according to government officials, in a development that could raise concerns about whether the agency needs a taxpayer bailout.

The required reserve level is a paltry 2%. Readers may recall that was the capital level Fannie and Freddie were operating with just before they were taken into conservatorship:

Federal law says the FHA must maintain, after expected losses, reserves equal to at least 2% of the loans insured by the agency. The ratio last year was around 3%, down from 6.4% in 2007.

No doubt the reserve ratio has fallen substantially since last year. The revised figure won’t be made available until FHA’s fiscal year ends Sept. 30th.

In the past two years, the number of loans insured by the FHA has soared and its market share reached 23% in the second quarter, up from 2.7% in 2006, according to Inside Mortgage Finance. FHA-backed loans outstanding totaled $429 billion in fiscal 2008, a number projected to hit $627 billion this year.

Rising defaults have eaten through the FHA’s cash cushion. Some 7.8% of FHA loans at the end of the second quarter were 90 days late or more, or in foreclosure, according to the Mortgage Bankers Association, a figure roughly equal to the national average for all loans. That’s up from 5.4% a year ago.
FHA’s exploding volumes are just another indicator of the substantial government support propping up house prices.

With all that volume, one would hope FHA had a robust risk management apparatus. Nope:

Critics have said the FHA, which has never had a chief risk officer, isn’t able to manage such a large portfolio and has weak underwriting standards.

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