To hear folks on Capitol Hill you might think the FHA mortgage program is just a blink away from failure, a blight on the American economy and a threat to homeowners everywhere. It's nonsense. The FHA has $48 billion in cash on hand.
So what's the big deal?
The FHA operates as a mortgage insurance program. It promises to cover lender losses if a loan goes bad. Like any insurance program it collects premiums, keeps reserves and pays out claims. With FHA insurance borrowers, mortgages are available with little down instead of 20 percent up-front. Today the reserve account is under-funded and the FHA has been required to accept $1.68 billion from the US Treasury.
This is constantly described as a "bailout" but think through the logic of the situation. The FHA has $48 billion in liquid assets. It doesn't need $1.68 billion from the Treasury, it needs nothing from the Treasury.
Money For Nothing
So why is the FHA asking for cash? Under the Federal Credit Reform Act of 1990 (FCRA) the FHA must have on hand enough cash to cover all probable losses anticipated during the next 30 years. Because of an accounting quirk created by Congress, an agency with $48 billion in the bank must ask for $1.68 billion today.
Make no mistake, the program has losses. What's not said -- what's hermetically kept from the public by critics -- is the source of those losses: FHA mortgage claims outpaced premium collections from 2000 through 2009, in other words it was the Bush Administration which drove the FHA program into the ground.
For instance, according to FHA Commissioner Carole Galante, loans made between 2005 and 2008 represent less than 15 percent of total originations over the last 30 years but are expected to contribute one-third of all losses.
Bush operatives also took two other steps to re-make FHA mortgages.
First, in 2004, they changed the FHA program from a mutual insurance program to, essentially, a for-profit plan with the government getting the profits. How? By ending insurance premium refunds to FHA borrowers and having the government keep the money.
Second, in 2008 -- after the presidential election -- FHA rules which had limited lender fees were eliminated. As the Bush Administration explained, it had decided to "remove the current specific limitations on the amounts mortgagees presently are allowed to charge borrowers directly for originating and closing an FHA loan."
Alternatively -- and what is also kept from the public -- is that the FHA now has massive profits -- more than $20 billion during the 2010-2012 period.
As loans from the Bush period are closed out FHA losses will decline and profits from the program will be undeniable. That's the reason there is such a hurry to enact FHA "reform" now, changes that would make the FHA smaller and less competitive.
This post was originally published at OurBroker.com and used by The Huffington Post with permission.