News Flash!! FHA is squeezed for money!

Mortgage and Lending with American Mortgage Network NMLS 228393

I found this to be very newsworthy information since many of AR members have been really focused on FHA and the First-Time Tax Credit.  What a bumpy ride it's going to be.  Tell me what you think!  We are about to see a whole lot of lenders disappearing as a result of this.  In fact, as of November 18th, FHA borrowers will no longer be able to finance their closing costs into their loans when they refinance, known as a "STREAMLINE REFINANCE" as one of the results of the current announcement.  We all better wish for a recovery and fast. 

The Federal Housing Administration has been hit so hard by the mortgage crisis that for the first time, the agency's cash reserves will drop below the minimum level set by Congress, FHA officials said.

The FHA guaranteed about a quarter of all U.S. home loans made this year, and the reserves are meant as a financial cushion to ensure that the agency can cover unexpected losses.

"It's very serious," FHA Commissioner David H. Stevens said in an interview. "There's nothing more serious that we're addressing right now, outside the housing crisis in general, than this issue."
[Stevens] said he is planning to announce Friday several measures that should help the reserves rebound quickly.
An independent audit due out this fall will show that the agency's reserves will drop below the 2 percent level as of Oct. 1, the start of the new fiscal year, Stevens said.
For one, he will propose that banks and other lenders that do business with the FHA have at least $1 million in capital they can use to repay the agency for losses if they were involved in fraud. Now, they are required only to hold $250,000. Second, he will propose that lenders also take responsibility for any losses due to fraud committed by the mortgage brokers with whom they work.
emphasis added

Here is a table of FHA lenders with a 2 year default rate of 15% or more (This consists of lenders with 100+ originations included). There are 10 lenders with "perfect" records (100% default), but they only have one or two originations each. Many of these lenders will probably go away with the new rules. 

The FHA is banking on a "recovery in the housing market":

The new audit shows that even without any new measures, the reserves will rebound to the required level within two or three years largely as the result of the recovery in the housing market, Stevens said. This calculation is based on projections of future home prices, interest rates and the volume and credit quality of FHA's business.

Comments (104)

Michael Loeb
TGC Financial - Port St Lucie, FL

This is not much of a shock, although I wish it was.  When the Sub Prime market went out like a match in a rain storm everyone looked to FHA as the new Sub Prime.  So why is it a shock that the rate of defaults is as high as it is?  Until the number of people employed starts to increase instead of decrease these numbers will not change.  Also remember that the unemployment rate does not take into account people who lost an $80K job and replaced it with a $25K job or worse.

Yet after spending more money that has ever been spent the currernt government hasn't created any new jobs except for the Czars that fill the west wing of the White House.  This is not a knock against Obama or his administration.  It is a comment on the severe flaw in our entire government.  They think that they can control the free market, they can smother it, but they can't control it.  Government cannot create wealth, only redistribute which others have created.  Or print money non-stop until it has no value at all.

If the FHA needs more money they will just have to raise interest rates on the bonds they sell until they can garner interest in investors.  Which in turn will raise mortgage rates, which in turn will make Congress whine and cry about affordable housing, which will make Congress do something more stupid than the things they've done in the past.

Do we see a patern arrising here??





Sep 19, 2009 12:25 PM
Valerie Van de Zilver


Amen!  Well said.

Sep 19, 2009 12:47 PM
Gene Riemenschneider
Home Point Real Estate - Brentwood, CA
Turning Houses into Homes

So the FHA health is dependent upon wishful thinking?  Without FHA this market will tank even worse.  I suspect Obama and company will just switch on the printing press.

Sep 19, 2009 01:58 PM
Anthony Felbab or Tony Felbab

Ted, don't scare the active rain people!  Did you know you showed up at the top of the blogs ?  Anyway there is absolutely no way  NO WAY that Obama will allow FHA to run out of money!! FHA has had tough times in the past and has always been bailed out by Uncle Sam...I hope the other people who commented on your blog read this.  To them I say...hey guys keep your heads up !!!

I might not have a crystal ball!  With 25 years of originating loans , the ball hasn't arrived on my doorstep as of yet.  However, please check out my blog that I wrote about a year ago on my opinion of what was going to happen to the Mortgage and Real Estate Industry...I had the crystal that day!!

Again, those who stay in, will survive. I am justing getting a little too old to stick around though...



Sep 19, 2009 04:13 PM
Shellie Alicia Carter
REAL. | Realtyka, LLC - Maplewood, NJ

This is such a scary prospect. As was waid earlier... No more bad news!  Unfortunately, that is not up to us.  I hope that those to whom we trust our lives and careers, I hope we can get our act together and build a future we can all be proud of.

Sep 19, 2009 05:07 PM
Jane Penttinen
V.I.P. Mortgage - Tucson, AZ
NMLS #222178

FHA has been through times like this in the past.  What they usually do is change the MIP.  Default rates on FHA sky rocketed with the advent of Ameridream and Nehemiah.  At the same time those programs were outlawed, the real estate bubble burst and unemployment went thru the roof.  FHA will change a little but it will be fine.

What really scares me is that Barney Frank wants to be appointed Secretary of HUD.  THAT will be a crises.

Sep 19, 2009 05:14 PM
Ken Spencer

Oh Boy Ted.  Great reading.  A lot of information, pro and con, just the reason I love checking these featured post.  I think you did a great job.  Thanks for posting.  Very educational to say the least.

Sep 19, 2009 07:46 PM
Diane Aurit
LKN Realty, LLC - Mooresville, NC
Lake Norman Real Estate

I am going to have to come back when I have time and read all of the comments as it sounds like there is much more to this than you wrote about.  Thank you for getting the dialogue going!

Sep 20, 2009 01:46 AM
Andrea Geller
HOT PROPERTY® The Chaz Walters Group at Coldwell Banker Residential Brokerage - Chicago, IL

Since the demise of the sub prime market, I have always viewed FHA as the next mortgage crisis. Some, not all, people who got subprime loans and have defaulted were homeowners that should have remained renters until the saved some money. Although the rapid downturn in the economy including job loss expedited the situation, home ownership is a responsibility some are just not ready for. FHA has just replaced sub prime loans as another avenue to make this very specific group of people glorified renters. When they cannot pay their "rent" anymore they just want to ditch the property.

Having said all that, I do believe it is a good program when used correctly.

Sep 20, 2009 03:00 AM
Mark Velasco
Sharpstone Commercial - Whittier, CA
Top Producing COMMERCIAL Team 30+ years experience

Wow Ted. I guess that the FHA people are now wising up a bit.

Sep 20, 2009 12:31 PM
Stephanie Reynolds
Integrity First Financial Group, Inc. - Santee, CA
East County San Diego Homes 619-838-4408

Wow. You sure sparked some controversy here Ted!

We must remember that over the last 2 years FHA has experienced jumps in producition numbers higher than they have seen in years. Combine these numbers with desperate homeowners, mortgage brokers/bankers, foreclosures, tighter lending guidelines and we find a HUGE increase in loan fraud. FHA MUST make appropriate changes to remain in the game. I applaud the changes, (although it willmake our jobs more difficult, and like we needed THAT) but in order for us to continue to have a product for our borrowers that actually DO qualify for a mortgage we must hang tight and allow for the bad seeds to be weeded out (again).

This product WILL continue to be available, and I believe WITHOUT government bailout!

Sep 20, 2009 12:59 PM
Steve Andrascik
Lake Mead Area Realty - Boulder City, NV

Another fine mess you have gotten us into, Ollie! Mu, mu, mu.

Sep 21, 2009 04:24 AM
Dave White
VA Loan Hero

Thanks for the post Ted. FHA has always been a fantastic alternative to conventional lending. I work at a Brokerage that refuses to get FHA licensed. In my mind that is Lending suicide. I am however an expert at VA Loans and that is what has carried me through the craziness. I would advise all Real Estate professionals to ask their potential clients if they have ever served in the service. Ted one thing I don't understand is why the FHA loan  guidelines become harsher. It is a full qualification program. IF we look at he over all default rate wanst 95% of the mess caused by subprime crap?

Sep 21, 2009 06:04 AM
Ted Canto
American Mortgage Network - Chandler, AZ
Arizonan #1 Mortgage Lender

WOW!  So many different responses.  I didn't know this was going to spark such a large response.  For the most part, I will agree with many of you that this will be sorted out and that FHA will be fine in the end.  However, it was worth posting as we all still have lots to learn in the way we move forward as an industry.  We should focus on sharpening our skills and improving on the integrity of our community.  For those that are out there doing funny stuff, be aware and be VERY SCARED!!  You will not last and you just might find yourself on the street or in jail. 

By the way, I wanted to provide everyone with this chart.  The chart tracks FHA loans in relation to the downturns in our market since the 1980's.  In fact the pattern has been relatively the same since the Depression.  So you understand what you are looking at, when charting the conventional loan line, the downward spikes is a reflection of our economy (down means down).  At every downward spike you will see FHA moving upwards.  As the FHA line charts upward you will notice Conventional  begins to follow then FHA falls off as the economy gets better.  I teach a class on this and it is quite interesting to say the least on how FHA has "HISTORICALLY" been such a great program to our country and our industry. 

Sep 21, 2009 06:38 AM
John DL Arendsen
CREST "BACKYARD' HOMES, ON THE LEVEL General & Manufactured Home Contractor, TAG Real Estate Sales & Investments - Leucadia, CA
Crest Backyard Homes "ADU" dealer & RE Developer

Any ideas what might happen to the manufactured home industry if FHA ran out of money. Presently the lions share if not nearly 100% of all Manufactured Home loans are FHA if not VA, guarneteed. Our company does the engineered certifications and foundation retrofitting and inspections on manufactured homes throughout the USA. If FHA goes down so do we in a heart beat.

Sep 21, 2009 07:09 AM
Shirley Grace - Realtor Washington DC

Did you read the entire letter that Dave Stephens sent out? Here's an excerpt;

 "To be clear, the fund's reserves are sufficient to cover our future losses, so the FHA will

not require taxpayer assistance or new Congressional action," said Commissioner Stevens.

"That said, given the size and scope of the FHA and its importance to today's market, these risk

management and credit policy changes are important steps in strengthening the FHA fund, by

ensuring that lenders have proper and sufficient protections."

Sep 21, 2009 07:20 AM
Kerry Jenkins
Prime Properties - Crestline, CA

Wow, and we want to do FHA loans right now since we can still use our own appraisers and not the stupid HVCC appraisal fiasco.

Sep 21, 2009 09:38 AM
Matt Robinson
Professional Investors Guild - Pensacola, FL

I wouldn't worry too much about it in the short term.  I'm sure that the current administration will just print up some more money and dump it into the FHA reserve account.  All is well with the world...well, at least until the dollar becomes worthless, inflation goes through the roof, and China stops lending us money.  But until then...all is well with the world...

Sep 22, 2009 05:12 AM
Lyn Sims
Schaumburg, IL
Real Estate Agent Retired

Tighter loan restrictions = less loans = less houses sold for us.  Ugggg........

Sep 23, 2009 05:42 AM
Betty Saenz REALTOR EcoBroker

Yes, this is not good news. FHA is the mainstay of 1st time homebuyers.

Nov 16, 2009 05:17 AM