The FHA’s finances are in a much worse state than previously thought, we discovered this week. Congress mandated that it must always maintain cash reserves of 2 per cent of the mortgages it insures, but these have fallen to 0.53 per cent. Meanwhile, the percentage of loans seriously in arrears has risen to 17.9 per cent.
Reversing its previous position, the agency said that, if the economic recovery goes into reverse, it might well have to increase the line of credit it has with the US Treasury, perhaps by $1.6bn in 2011. It says that this would only be a problem in a serious double-dip recession, but we know from the Fannie Mae and Freddie Mac debacle that the government’s housing market experts are prone to crunching the numbers optimistically.
Why have things deteriorated so fast? The reason is that the FHA has been ramping up its activities in the past two years. As the private sub-prime mortgage market collapsed, the agency stepped in to provide financing options for the “good” sub-prime borrowers who at least could prove their income. From insuring less than 2 per cent of the market in 2006, the FHA now puts its effective government guarantee behind one in four new US mortgages.