FHA to seek a taxpayer bailout?

FHA to seek a taxpayer bailout?

Last week, the Federal Housing Administration made headlines when it ended September with $16.3 billion in projected losses. Now some officials are speculating that the Administration will need a taxpayer “bailout” by the US Treasury.

The FHA is required to hold cash in reserve to cover its liabilities—the mortgages it ensures. However, the housing recovery has been slower than anticipated and expected losses are $16.3 billion below previously predicted losses.

The FHA is not a bank—it does not loan individuals money. The agency guarantees loans made by banks in exchange for insurance premiums (Los Angeles Times). According to Inside Mortgage Finance, since the crash of US housing markets the FHA has expanded to insure approximately $1.1 trillion in loans.

However, not all are speculating a taxpayer bailout for the FHA. In fact, Kenneth R. Harney of the Boston Herald believes that there is a strong possibility the FHA will not require any type of bailout from the Treasury. After reports of massive losses for the 2012 fiscal year, the FHA is restructuring its insurance policy to increase revenue flows to the agency. Consequently, borrowers are likely to incur slightly higher (1.35% as opposed to 1.25%) annual mortgage insurance premiums next year. On loans larger than $625,500 high-cost areas, the annual premium will increase form 1.5% to 1.6%. Harney states that this increase could cause some buyers to check out private insurers offering lower rates, but does not foresee this as a major issue for most buyers.

Furthermore, the FHA is no longer allowing borrowers to cancel payments when their loan balance decreased to 78% of property value (Boston Herald).

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