Will the FHA Need a Bailout?

Maybe now really is the time to get that cheap (3% down) mortgage loan.

Why? Because evidence is accumulating that the Federal Housing Administration is running out of money. Or, as the FHA politically puts it, the possibility exists that cash reserves "will go below zero and stay there."

Here’s the back story — and what it means to mortgage consumers.

A lot is at stake when it comes to the FHA and its long-term solvency. Currently, the FHA handles $680 billion of single-family home mortgages — all fully insured by the FHA, and by extension, the federal government.

But the financial outlook is sketchy, to say the least. According to the Integrated Financial Engineering, a Rockville, Md.-based financial auditing firm, FHA cash reserves have fallen to $3.6 billion (as of Sept. 30). That’s 0.53% of its total mortgage obligations. According to the FHA’s charter, the minimum cash reserve is 2% or $13.6 billion, based on those current financial obligations.

By any measure, that $3.6 billion is a disturbing number, especially given the fact that, in the past year alone, the FHA has burned through $9.6 billion in cash reserves. You don’t have to be Copernicus to figure out that if that scenario transpires in 2010, the FHA could be — to borrow a term — "underwater."

While the federal government wouldn’t likely let that happen (Uncle Sam is required by law to loan the FHA the money it needs to stay in the black), government auditors say any dip into negative equity territory should be a short one. The FHA reports that, at the absolute worst case scenario, the agency would need around $1.6 billion to cover its mortgage portfolio by 2011 — but that’s assuming an improved mortgage market and lower homeowners mortgage delinquency rates.

One point that favors the FHA is that the loans it is currently making are more stable than loans made in recent years. The agency is loaning money to higher-quality consumers, and has weeded out a good chunk of the sub-prime, variable-rate and other risky mortgage practices that have contributed to the toxic markets of late.

For FHA mortgage borrowers, the future could mean having a lot more — maybe 20% — of a cash down payment compared to the 3.5% the FHA requires now. Also, borrowers would need a significantly higher credit score — the FHA has already upped its preferred credit score to 693 from 633.

Again, it’s too early to say that the FHA is running out of money. But it does seem to be depending on some rosy economic scenarios, especially a more robust housing market, just as the tea leaves seem to be telling a more discouraging tale.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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