FHA Reserves Low

While the FHA is trying to avoid a government bailout, its reserves have fallen to a dangerously low level. By the end of the 2009 Fiscal Year on September 30, the FHA only had $3.6 billion in reserves, compared with $685 billion in outstanding insured loans. This brings their ratio to .53%, far below the government mandated 2%. Still, the FHA insists that only in their worst case scenario, which has housing prices in the 10 largest cities falling another 28% below their current level and the unemployment rate rising to 12.5% from the current 10.2%, would they need a taxpayer bailout.

Nonetheless, it appears that the FHA is in trouble. 17% of FHA borrowers are delinquent on their mortgages, compared with 13% on all the mortgages issued, according to the Mortgage Bankers Association (MBA). As a result, it's not surprising that the FHA is taking significant losses. Although the FHA insists that their borrowers have higher credit scores than before, the FHA is insuring nearly 25% of all mortgages and almost 50% of those to first-time homebuyers. Given how volatile the economy has been, it should come as no shock that many borrowers continue to be at risk of default and foreclosure if they lose their jobs to the poor economy. First-time homebuyers may be more likely than experienced homeowners to overestimate their financial readiness to own a home.

Some of the proposed solutions include raising the mortgage insurance premium (MIP) and increasing the down payment requirement on FHA loans to 5% from its current 3.5% level. Rep. Scott Garrett (R-NJ) was quoted by the NY Times as saying, "The administration has to stand up and say, "This is what's best for the taxpayer." It is clear that asking taxpayers to help with the bailout is a last resort, and one that is trying to be avoided.