FHA hits bottom on loans
Cash reserves at illegally low levels
By Jerry Kronenberg | Saturday, September 19, 2009 |
http://www.bostonherald.com | Business & Markets
Photo by Herald file
The Federal Housing Administration’s reserves for bad loans have hit illegally low levels, but the agency vows it won’t become the latest financial giant to need a government bailout.
“To be clear, (reserves) are sufficient to cover our future losses,” FHA chief David Stevens said yesterday in announcing that his agency’s capital reserves have dropped below a required 2 percent minimum.
The FHA has promoted mortgage lending since the Great Depression by insuring banks against losses that arise when consumers default on loans.
But the agency jumped into the market with both feet last year when the global credit crunch all but dried up traditional mortgage lending.
As a result, FHA loans account for some 40 percent of all new U.S. mortgages, up from just 3 percent or so two years ago.
Some experts warn that the FHA has backed so many mortgages so quickly that the agency risks collapse if enough of its hastily approved loans default.
“Everybody recognizes the fact that the FHA has overextended itself by going down this path,” said Kevin Cuff of the Massachusetts Mortgage Bankers Association. “There’s a lot of risk involved.”
U.S. Rep. Stephen Lynch (D-South Boston), who told the Herald in May that he feared a possible FHA meltdown, said yesterday that he wants the agency “called on the carpet.”
“FHA officials have to convince Congress that they can get the agency back into compliance (with the 2 percent rule),” said Lynch, a member of a legislative committee that oversees mortgage lending.
Still, Lynch believes there are enough safeguards in place to prevent a crisis if lawmakers keep the FHA’s feet to the fire.
U.S. Rep. Barney Frank, the Newton Democrat who chairs the committee Lynch sits on, agreed. “I don’t think there’s any danger here of serious problems,” he said.
Stevens announced a series of steps yesterday to minimize the risk of an FHA meltdown. For example, he said the agency plans to soon hire the first “chief risk officer” in its 75-year history.
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http://www.bostonherald.com/business/general/view.bg?articleid=1198521
