the federal housing administration saved the housing market

7/31/2019 The Federal Housing Administration Saved the Housing Market

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1 Center or American Progress | The Federa l Housin g Ad ministration Saved the H ousing Market

The Federal Housing Administration

Saved the Housing MarketJohn Griffith October 2012

Introduction

For close o 80 years he Federal Housing Adminisraion has helped millions o

working-class amilies achieve homeownership and has promoed sabiliy in he U.S.

housing markeall a no cos o axpayers. Te governmen-run morgage insurer is acriical par o our economy, helping rs-ime homebuyers and oher low-wealh bor-

rowers access he long-erm, low down-paymen loans hey need o aord a home.

More recenly, he agency prevened a complee collapse in he housing marke, likely

saving us rom a double-dip recession. As privae invesors rereaed rom he morgage

business in he wake o he wors housing crisis since he Grea Depression, he Federal

Housing Adminisraion increased is insurance aciviy o keep money owing ino he

marke. Wihou he agencys suppor, i would have been much more dicul or middle-

class amilies o ge a home loan since he crisis began. Home prices would have plum-

meed even urher, households would have los much more wealh han hey already didduring he crisis, and even more amilies would have los heir homes o oreclosure.

A urher decline in he housing marke would have sen devasaing ripples hrough-

ou our economy. By one esimae, he agencys acions prevened home prices rom

dropping an addiional 25 percen, which in urn saved 3 million jobs and hal a rillion

dollars in economic oupu.1

Bu he agency was no immune o he housing crisis. oday i aces mouning losses on

loans ha originaed as he marke was in a reeall. Housing markes across he Unied

Saes appear o be on he mend, bu i ha recovery slows, he agency may soon require

suppor rom axpayers or he rs ime in is hisory.

I ha were o happen, any nancial suppor would be a good invesmen or axpayers.

Over he pas our years, he Federal Housing Adminisraions eors saved amilies

billions o dollars in home equiy (a 25-percen drop in home prices ranslaes o abou

$3 rillion in los propery values oday),2 kep ineres raes rom skyrockeing (and


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wih hem monhly morgage paymens), and helped millions o workers keep heir

jobs.3 Any suppor would amoun o a iny racion o he agencys conribuion o our

economy in recen years. (Well discuss he deails o ha suppor laer in his brie.)

In addiion, any uure axpayer assisance o he agency would almos cerainly be

emporary. Te reason: Morgages insured by he Federal Housing Adminisraion in

more recen years are likely o be some o is mos proable ever, generaing surplusesas hese loans maure. Tis is due in par o new proecions and ighened underwriing

sandards pu in place by he Obama adminisraion.

Te chance o governmen suppor has always been par o he deal beween axpayers and

he Federal Housing Adminisraion, even hough ha suppor has never been needed.

Since is creaion in he 1930s, he agency has been backed by he ull aih and credi o

he U.S. governmen, meaning i has ull auhoriy o ap ino a sanding line o credi wih

he U.S. reasury in imes o exreme economic duressand no ac o Congress is neces-

sary.4 Exending ha credi isn a bailouis ullling a legal promise.

Looking back on he pas hal-decade, is acually quie remarkable ha he Federal

Housing Adminisraion has made i his ar wihou our help. Five years ino a crisis

ha brough he enire morgage indusry o is knees and led o unprecedened bail-

ous o he counry s larges nancial insiuions, he agencys doors are sill open or

business. Tis issue brie pus he agencys curren nancial roubles in perspecive. I

explains he role ha he Federal Housing Adminisraion has had in our nascen hous-

ing recovery, provides a picure o where our economy would be oday wihou i, and

lays ou he risks in he agencys $1.1 rillion insurance porolio.

The Federal Housing Administration is a government-run mortgage

insurer. It doesnt actually lend money to homebuyers but instead insures

the loans made by private lenders, as long as the loan meets strict size

and underwriting standards. In exchange or this protection, the agency

charges up-ront and annual ees, the cost o which is passed on to bor-

rowers.

During normal economic times, the agency typically ocuses on borrowers

that require low down-payment loansnamely rst time homebuyers

and low- and middle-income amilies. During market downturns (when

private investors retract, and its hard to secure a mortgage), lenders tend

rely on Federal Housing Administration insurance to keep mortgage cred

fowing, meaning the agencys business tends to increase. Through this s

called countercyclical support, the agency is critical to promoting stabili

in the U.S. housing market.

The Federal Housing Administration is expected to run at no cost to gov-

ernment, using insurance ees as its sole source o revenue. In the event

a severe market downturn, however, the FHA has access to an unlimited

line o credit with the U.S. Treasury. To date, it has never had to draw on

those unds.

What does the Federal Housing Administration do?


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Without the Federal Housing Administration, the housing downturn

would have been much worse

Since Congress creaed he Federal Housing Adminisraion in he 1930s hrough he

lae 1990s, a governmen guaranee or long-erm, low-risk loanssuch as he 30-year

xed-rae morgagehelped ensure ha morgage credi was coninuously available

or jus abou any crediworhy borrower. In he decades leading up o he recen crisis,he agency served a small bu meaningul segmen o he U.S. housing marke, ocusing

mosly on low-wealh households and oher borrowers who were no well-served by he

privae marke.

In he lae 1990s and early 2000s, he morgage marke changed dramaically. New

subprime morgage producs backed by Wall Sree capial emerged, many o which

compeed wih he sandard morgages insured by he Federal Housing Adminisraion.5

Tese producs were ofen poorly underwriten (i underwriten a all) and were easier

o process han FHA-backed loans, ofen ranslaing ino ar beter compensaion or

heir originaors. Tis gave lenders he moivaion o seer borrowers oward higher-riskand higher-cos subprime producs, even when hey qualied or saer FHA loans.

As privae subprime lending

ook over he marke or low

down-paymen borrowers in

he mid-2000s, he agency

saw is marke share plumme.

In 2001 he Federal Housing

Adminisraion insured 14 per-

cen o home-purchase loans; by2005 ha number had decreased

o less han 3 percen.6

Te res o he sory is well-

known. Te inux o new and

largely unregulaed subprime

loans conribued o a massive

bubble in he U.S. housing mar-

ke. In 2008 he bubble burs in

a ood o oreclosures, leading

o a near collapse o he housing marke. Wall Sree rms sopped providing capial o

risky morgages, banks and hrifs pulled back, and subprime lending essenially came

o a hal. Te morgage gians Fannie Mae and Freddie Mac, acing massive losses on

heir own risky morgage invesmens, were placed under governmen conservaor-

ship and signicanly scaled back lending, especially or home-purchase loans wih

low down paymens.

FIGURE 1

As private investors left the mortgage market, FHA insurance filled the gap

Share o annual origination volume (home purchases and reinancings), 20032010

FHA/VA market share Subprime/Alt-A market share Total origination volume ($)

0%

5%

10%

15%

20%

25%

30%

35%

40%

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

2003 2004 2005 2006 2007 2008 2009 2010

Percentageoftotaloriginationvolume T

otaloriginationvolume($billions)

Source: Center or Responsible Lending (citing data rom Inside Mortgage Finance) and the Mortgage Bankers Association


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Te Federal Housing Adminisraions lending aciviy hen surged o ll he gap lef by

he alering privae morgage marke. By 2009 he agency had aken on is bigges book

o business ever,7 backing roughly one-hird o all home-purchase loans.8 Since hen he

agency has insured a hisorically large percenage o he morgage marke, and in 2011

backed roughly 40 percen o all home-purchase loans in he Unied Saes.9

By playing his key counercyclical role, he Federal Housing Adminisraion ensuredha middle-class amilies could sill buy homes, prevening a more devasaing marke

downurn caused by a hal in home sales. Te agency has backed more han 4 million

home-purchase loans since 2008 and helped anoher 2.6 million amilies lower heir

monhly paymens by renancing.10 Wihou he agencys insurance, millions o home-

owners migh no have been able o access morgage credi since he housing crisis

began, which would have sen devasaing ripples hroughou he economy.

Is dicul o quaniy he agencys exac conribuion o our economy in recen years.

Bu when Moodys Analyics sudied he opic in he all o 2010, he resuls were sag-

gering. According o preliminary esimaes, i he Federal Housing Adminisraion hadsimply sopped doing business in Ocober 2010, by he end o 2011 morgage ineres

raes would have more han doubled; new housing consrucion would have plunged by

more han 60 percen; new and exising home sales would have dropped by more han

a hird; and home prices would have allen anoher 25 percen below he already-low

numbers seen a his poin in he crisis.11

A second collapse in he housing marke would have sen he U.S. economy ino a dou-

ble-dip recession. Had he Federal Housing Adminisraion closed is doors in Ocober

2010, by he end o 2011, gross domesic produc would have declined by nearly 2 per-

cen; he economy would have shed anoher 3 million jobs; and he unemploymen raewould have increased o almos 12 percen, according o he Moodys analysis.12

TABLE 1

Without the Federal Housing Administration, the housing market would have

collapsed in 2011, sending the U.S. economy into a double-dip recession

Projected year-to-year changes in key economic indicators had the agency stopped insuring

mortgages in October 2010

Indicator Percent change

U.S. housing market

Fixed Mortgage Rate +6.7 percentage points

Residential Housing Starts -63.0%

New and Existing Home Sales -40.5%

Median Existing-House Price -25.0%


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Indicator Percent change

Broader economy

Total Employment -2.7%

Unemployment Rate +1.6 percentage points

Gross Domestic Product -3.7%

S&P 500 -39.2%

Source: Drat estimates rom Moodys Analytics, October 2010

[Te Obama adminisraion] empowered he Federal Housing Adminisraion o

ensure ha households could nd morgages a low ineres raes even during he wors

phase o he nancial panic, wroe Mark Zandi, chie economis a Moodys Analyics,

in Te Washington Postlas monh. Wihou such credi, he housing marke would have

compleely shu down, aking he economy wih i.13

The Federal Housing Administ ration was avai lable when other insurerswere not but became vulnerable to losses in the process

Despie a long hisory o insuring sae and susainable morgage producs, he Federal

Housing Adminisraion was sill hi hard by he oreclosure crisis. Te agency never

insured subprime loans, bu he majoriy o is loans did have low down paymens, leav-

ing borrowers vulnerable o severe drops in home prices.

Te agency is currenly acing massive losses on loans insured in he laer years o he

housing bubble and he early years o he nancial crisis, when lenders saring urning

o he agency o susain heir originaion volume and cerain homebuyers ound ewalernaives o FHA-insured loans (mainly hose who didn have prisine credi and

cash or a 20-percen down paymen).14 Tese losses are he resul o a higher-han-

expeced number o insurance claims, resuling rom unprecedened levels o oreclo-

sure during he crisis.

According o recen esimaes rom he Oce o Managemen and Budge, loans

originaed beween 2005 and 2009 are expeced o resul in an asounding $27 billion

in losses or he Federal Housing Adminisraion. Te 2008 book o business alone

accouns or abou $11 billion o hose losses, making i he wors book in he agencys

hisory by jus abou any meric (he agency evenually srenghened is business by

issuing new underwriing sandards and oher proecions ha ook eec second scal

quarer o 2009which well discuss laer in his issue brie.)15

Tese books o business have a high concenraion o so-called seller-nanced down

paymen assisance loans, in which sellers covered he required down paymen a he

ime o purchase ofen in exchange or inaed purchase-prices.16 Seller-nanced loans


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were ofen riddled wih raud and end o deaul a a much higher rae han radiional

FHA-insured loans. Tey made up abou 19 percen o he oal originaion volume

beween 2001 and 2008 bu accoun or 41 percen o he agencys accrued losses on

hose books o business, according o he agencys laes acuarial repor.17

For years he Federal Housing Adminisraion ried o eliminae seller-nanced down pay-

men assisance rom is programs bu me srong opposiion in Congress, hanks in paro a well-coordinaed lobbying eor by a coaliion o he nonpro companies, housing

and minoriy groups and home

builders, according o Te Wall

Street Journal.18 Congress nally

banned seller-nanced loans rom

he agencys insurance programs

in he Housing and Economic

Recovery Ac o 2008 (which

didn acually ake eec unil he

second scal quarer o 2009). Isuch a ban had been in place rom

he sar, he agency could have

avoided more han $14 billion in

losses, which would have pu i

in a much beter capial posiion

going ino he crisis, according o

he laes acuarial repor.19

While millions o FHA-backed

loans have already ended in aninsurance claim ha had o be

paid by he agency, millions

more are sill in he oreclosure

pipeline. For insance, roughly

one in our ousanding FHA-

backed loans made in 2007 or

2008 is seriously delinquen,

meaning he borrower has

missed a leas hree paymens

or is in bankrupcy or oreclo-

sure proceedings.20

A disproporionae percenage o

he agencys serious delinquen-

cies are seller-nanced loans ha originaed beore January 2009 (when such loans go

banned rom he agencys insurance programs). According o agency esimaes, roughly

FIGURE 2

A high percentage of FHA-insured loans originated in 2006, 2007, and

2008 are expected to go to claim in the near future

Percentage o FHA-backed mortgages that have missed at least three consecutive

payments or are in bankruptcy/oreclosure processing

0%

5%

10%

15%

20%

25%

30%

Pre-2004 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011

10.6%

13.5%

15.9%

19.5%

26%25.2%

12.5%

5.4%

2%

0%

5%

10%

15%

20%

25%

30%

35%

FHA Prime-fixed Prime-ARM Subprime -fixed Subprime -ARM

9%

4%

13.4%

18.4%

32.9%

But as a whole, FHAs delinquency rates are much lower than riskier

mortgage products

Percentage o mortgages that have missed at least three consecutive payments or are in

bankrupcy/oreclosure processing by type o loan

Source: Mortgage Bankers Association National Delinquency Survey, First Quarter o 2012

Source: Federal Housing Administrations Delinquency and Claim Rate Activity and Trends Report, July 2012


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725,000 FHA-backed loans are seriously delinquen oday, and abou 14 percen

o hose loans had seller-nanced down-paymen assisance. By comparison, seller-

nanced loans make up jus 5 percen o he agencys oal insurance in orce oday. 21

As riskier loans pass through the system, the agency s more recent

books of business are very strong

While he losses rom loans originaed beween 2005 and early 2009 will likely coninue

o appear on he agencys books or several years, he Federal Housing Adminisraions

more recen books o business are expeced o be very proable, due in par o new risk

proecions pu in place by he Obama adminisraion. Beginning in 2009 he agency

increased insurance premiums our imeso he highes levels in is hisory. I also

enorced new rules ha require borrowers wih low credi scores o pu down higher

down paymens, ook seps o conrol he source o down paymens, overhauled he

process hrough which i reviews loan applicaions, and ramped up eors o minimize

losses on delinquen loans.22

As a resul o hese and oher

changes enaced since 2009, he

2010 and 2011 books o busi-

ness are ogeher expeced o

bolser he agencys reserves by

nearly $14 billion, according o

recen esimaes rom he Oce

o Managemen and Budge.

Te new 2012 book o businessis projeced o add anoher $3.7

billion o heir reserves, urher

balancing ou losses on previous

books o business.23

Tese are, o course, jus projec-

ions, bu he ighened under-

wriing sandards and increased

oversigh procedures are already

showing signs o improvemen.

A he end o 2007 abou 1 in

40 FHA-insured loans experienced an early period delinquency, meaning he borrower

missed hree consecuive paymens wihin he rs six monhs o originaionusually an

indicaion ha lenders had made a bad loan. Ta number is closer o 1 in 250 oday.24

FIGURE 3

FHAs books of business have gotten much stronger since the housing

crisis began

Total economic value o each book o single-amily business (in millions o dollars),

20012012

Source: Ofce o Management and Budget, Federal Credit Supplement in the FY 2013 budget

-$10,000

$0

$10,000

-$15,000

-$5,000

$5,000

$15,000

2003 2004 2005 2006 2007 2008 2009 201020022001 2011 2012

(projected

$3,659

-$97 -$407-$1,496 -$1,937

-$3,020 -$3,323-$5,244

-$10,928

-$4,571

$3,870

$9,802


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The agency s capita l reserves are st il l uncomfor tably low today

Despie hese improvemens, he capial reserves in he Muual Morgage Insurance

Fundhe und ha covers jus abou all he agencys single-amily insurance busi-

nessare uncomorably low. Each year independen acuaries esimae he unds eco-

nomic value: I he Federal Housing Adminisraion simply sopped insuring loans and

paid o all is expeced insuranceclaims over he nex 30 years,

how much cash would i have lef

in is coers? Tose excess unds,

divided by he oal amoun o

ousanding insurance, is known

as he capial raio.

Te Federal Housing

Adminisraion is required by

law o mainain a capial raioo 2 percen, meaning i has o

keep an exra $2 on reserve or

every $100 o insurance liabiliy,

in addiion o whaever unds

are necessary o cover expeced

claims. As o he end o 2011, he

unds capial raio was jus 0.24

percen, abou one-eighh o he

arge level.25

Te agency has since recovered more han $900 million as par o a setlemen wih he

naions bigges morgage servicers over raudulen oreclosure aciviies ha cos he

agency money.26 While ha has helped o improve he unds nancial posiion, many

observers speculae ha he capial raio will all even urher below he legal require-

men when he agency repors is nances in November.

Tis is a legiimae concern bu no one ha should be oversaed. As required by law,

he Muual Morgage Insurance Fund sill holds $21.9 billion in is so-called nancing

accoun o cover all o is expeced insurance claims over he nex 30 years using he

mos recen projecions o losses. Te unds capial accoun has an addiional $9.8 bil-

lion o cover any unexpeced losses.27

Tas no enough o mee he 2 percen capial raio arge, bu he agency sil l has

pleny o cash on hand o cover is insurance liabiliies based on reasonable expecaions

in he housing markeand even has some exra money se aside or a rainy day.

FIGURE 4

FHAs tightened underwriting and increased oversight on lenders have

caused early delinquencies to drop significantly since the crisis began

Quarterly percentage o loans that have a 90-day deault within 6 months o origniation,

20072011

Source: Federal Housing Administration, Quarterly Report to Congress or Q3 2012

0%

.5%

1%

1.5%

2%

2.5%

3%

Q4

2007

Q3

2007

Q2

2007

Early delinquency rate

Q1

2008

Q2

2008

Q3

2008

Q4

2008

Q1

2009

Q2

2009

Q3

2009

Q4

2009

Q1

2010

Q2

2010

Q3

2010

Q4

2010

Q1

2011

Q2

2011

Q3

2011

Q4

2011


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Ta said, he agencys curren

capial reserves do no leave

much room or uncerainy,

especially given he diculy o

predicing he near-erm oulook

or housing and he economy. In

recen monhs, housing markesacross he Unied Saes have

shown early signs o a recovery.

I ha rend coninuesand

we hope i doesheres a good

chance he agencys nancial

roubles will ake care o hem-

selves in he long run.28

Bu i he recovery salls and

home prices begin o dip lowerwhich likely would cause anoher

wave o oreclosureshe

Federal Housing Adminisraions

capial cushion may no be

sucien. In ha unorunae

even, he agency may need some emporary suppor rom he U.S. reasury as i works

hrough he remaining bad deb in is porolio. Tis suppor wouldkick in auomai-

callyis always been par o Congress agreemen wih he agency, daing back o he

1930sand would amoun o a iny racion o he agencys porolio.29 I would also be

a bargain, considering how axpayers have beneted rom he agency over he pas eighdecadesand especially he pas our years.

FIGURE 5

Though the capital buffer is depleting, FHA still has plenty of money in its

financing account to keep business going

FHAs overall capital position and total insurance in orce, Q3 2009Q3 2012 ( in billions)

Source: Federal Housing Administration, Quarterly Report to Congress or Q3 2012

$600

$0

$5

$10

$15

$20

$25

$30

$35

$800

$1,000

$1,200

$400

$200

$0

$40

Totalcapitalresources($

billions)

Totalinsurance

inforce

($

billions)

Q3

2009

Q4

2009

Q1

2010

Q2

2010

Q3

2010

Q4

2010

Q1

2011

Q2

2011

Q3

2011

Q4

2011

Q1

2012

Q2

2012

Q3

2012

Capital reserve Financing account Total insurance in force

Once a year the Federal Housing Administration moves money rom its

capital account to its nancing account, based on re-estimated expecta-

tions o insurance claims and losses. (Think o it as moving money rom

your savings account to your checking account to pay your bills.) I theres

not enough in the capital account to ully und the nancing account,

money is drawn rom an account in the U.S. Treasury to ll the gap.

Such a transer does not require any action by Congress. Like all ederal

loan and loan guarantee programs, the Federal Housing Administration

insurance programs are governed by the Federal Credit Reorm Act o

1990, which permits them to draw on Treasury unds i and when they a

needed.30

How would taxpayer support to the Federal Housing Administration work?


10/12


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Endnotes

1 Unpublished estimates rom Moodys Analytics, October2010. Data provided to the author rom Moodys Analytics.

2 According to CoreLogic, total property values in the U.S.totaled about $12.4 trillion at o September 2012. For more,see http://www.corelogic.com/about-us/news/asset_up-load_le516_16435.pd.

3 Unpublished estimates rom Moodys Analytics, October2010. Data provided to the author rom Moodys Analytics.

4 The 1934 National Housing Act, which created the FederalHousing Administration, states: In the event that theamount in the [Mutual Mortgage I nsurance] Fund is insu-cient to pay upon demand, when due, the principal o orinterest on any debentures so guaranteed, the Secretary othe Treasury shall pay to the holders the amount thereowhich is hereby authorized to be appropriated out o anymoney in the Treasury not otherwise appropriated, andthereupon to the extent o the amount so paid the Sec-retary o the Treasury shall succeed to all the rights o theholders o such debentures. See P.L. 479, Sec. 204 (b).

5 John A. Karikari, Ioan Voicu, and Irene Fang, FHA vs.Subprime Mortgage Originations: Is FHA the Answer toSubprime Lending? Journal o Real Estate Finance andEconomics 43 (4) (2011): 441-458 available at http://papers.

ssrn.com/sol3/papers.cm?abstract_id=1824923.

6 Department o Housing and Urban Development, FHA-Insured Single Family Mortgage Originations and MarketShare Report 2011- Q3, (2011), available at http://portal.hud.gov/hudportal/documents/huddoc?id=hamktq3_11.pd.

7 Department o Housing and Urban Development, AnnualReport to Congress Regarding the Financial Status o theFHA Mutual Mortgage I nsurance Fund Fiscal Year 2011,(2011), available at http://portal.hud.gov/hudportal/docu-ments/huddoc?id=FHAMMIFundAnnRptFY11No2.pd.

8 Department o Housing and Urban Development,FHA-Insured Market Share Report 2011, (2011), avail-able at http://portal.hud.gov/hudportal/documents/huddoc?id=hamktq3_11.pd.

9 Department o Housing and Urban Development, FHAIssues Annual Financial Status Report to Congress, Press

release, November 15, 2011, available at http://portal.hud.gov/hudportal/HUD?src=/press/press_releases_media_ad-visories/2011/HUDNo.11-270.

10 Department o Housing and Urban Development, FHASingle-Family Mutual Mortgage Insurance Fund Programs,Q3 2012, (2012), available at http://portal.hud.gov/hudpor-tal/HUD?src=/program_oces/housing/rmra/oe/rpts/rtc/hartcqtrly.

11 Unpublished estimates rom October 2010. Data providedto the author rom Moodys Analytics.

12 Ibid.

13 Mark Zandi, Obama policies ended housing ree all,The Washington Post, September 28, 2012, available athttp://www.washingtonpost.com/realestate/obama-policies-ended-housing-ree-all/2012/09/27/20635604-0372-11e2-9b24-730c76312_story.html.

14 Some analysts, such as Robert Van Order and AnthonyYezer rom George Washington University, argue that FHAsrigid and infexible structure might have actually helpedthe agency stem losses during the c risis. For example, asthe subprime bubble grew, Fannie Mae and Freddie Maceventually changed its underwriting and other rules tocompete with the subprime market. FHA was hard-wiredby legislation, meaning it continued to lose market share atjust the right time, according to Van Order and Yezer. Formore inormation, see FHA Assessment Report: The Roleo the Federal Housing Administration in a Recovering U.

S. Housing Market at http://business.gwu.edu/les/ha-assessment-report-02-2011.pd.

15 For example, when Congress banned seller-nanced downpayment assistance in 2008, the law stated that FHA couldnot insure any seller-nanced loans that closed a ter Sep-tember 2008. But it takes some time or those loans to be

processed or FHA insurance, so FHA insured approximately40,000 seller-nanced loans in October and November - therst months o scal year 2013. Losses on these loans counttoward the FY 2013 book o business.

16 According to a 2005 study rom the Government Account-ability Oce, FHA-insured homes bought with seller-undednonprot assistance were appraised at and sold or about 2to 3 percent more than comparable homes bought withoutsuch assistance. For more inormation, see GAO-06-24:Additional Action Needed to Manage Risks o FHA-InsuredLoans with Down Payment Assistance, available at http://www.gao.gov/new.items/d0624.pd.

17 Integrated Financial Engineering, Actuarial Review o theFederal Housing Administration Mutual Mortgage InsuranceFund Forward Loans For Fiscal Year 2011. (Department oHousing and Urban Development, 2011), available at http://portal.hud.gov/hudportal/HUD?src=/program_oces/housing/rmra/oe/rpts/actr/actrmenu

18 Nick Timiraos, U.S.-Backed Mortgage Program Fuels Risks:FHA Struggles to Eliminate Loans or Zero Down, The WallStreet Journal, June 24, 2008, available at http://online.wsj.com/article/SB121426681678998589.html.

19 Ibid.

20 Department o Housing and Urban Development,FHA Single-Family Mutual Mortgage Insurance FundQuarterly Report to Congress FY 2012 Q2, (2012), avail-able at http://portal.hud.gov/hudportal/documents/huddoc?id=MMIQtrlyQ2_2012Final.pd.

21 Authors analysis o data reported in FHAs Single FamilyInsurance Delinquency and Claim Rate Activity and TrendsReport, July 2012.

22 To urther contain losses, FHA in June announced plans toexpand an initiative or the bulk sale o seriously delinquentloans to investors that specialize in working with struggling

homeowners. Since a seriously delinquent loan is very likelyto end up in an insurance claim, these sales will etch lessthan the total amount owed on the loan but more than theagency would expect to recoup through the oreclosureprocess, meaning the agency saves money. In exchange,the buyer agrees to delay oreclosure or at least six monthsand negotiates a new deal with the delinquent borrower,increasing the amilys chance o staying in their home. Formore, see John Grith, The FHA is on Board With PrincipalReduction (Washington: Center or American Progress,2012), available at http://www.americanprogress.org/issues/housing/news/2012/06/11/11699/the-ha-is-on-board-with-principal-reduction/.

23 Integrated Financial Engineering, Actuarial Review.

24 Department o Housing and Urban Development, FHASingle-Family Quarterly Report to Congress.

25 Department o Housing and Urban Development, Annual

Report to Congress.

26 Secretary Shaun Donovan, Testimony beore the Subcom-mittee on Banking, Housing, and Urban Aairs, FY 2013Budget Request or the Department o Housing andUrban Development, April 26, 2012, available at http://portal.hud.gov/hudportal/HUD?src=/press/testimo-nies/2012/2012-04-26.

27 Ibid.
http://www.corelogic.com/about-us/news/asset_upload_file516_16435.pdfhttp://www.corelogic.com/about-us/news/asset_upload_file516_16435.pdfhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=1824923http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1824923http://portal.hud.gov/hudportal/documents/huddoc?id=fhamktq3_11.pdfhttp://portal.hud.gov/hudportal/documents/huddoc?id=fhamktq3_11.pdfhttp://portal.hud.gov/hudportal/documents/huddoc?id=fhamktq3_11.pdfhttp://portal.hud.gov/hudportal/documents/huddoc?id=FHAMMIFundAnnRptFY11No2.pdfhttp://portal.hud.gov/hudportal/documents/huddoc?id=FHAMMIFundAnnRptFY11No2.pdfhttp://portal.hud.gov/hudportal/documents/huddoc?id=fhamktq3_11.pdfhttp://portal.hud.gov/hudportal/documents/huddoc?id=fhamktq3_11.pdfhttp://portal.hud.gov/hudportal/HUD?src=/press/press_releases_media_advisories/2011/HUDNo.11-270http://portal.hud.gov/hudportal/HUD?src=/press/press_releases_media_advisories/2011/HUDNo.11-270http://portal.hud.gov/hudportal/HUD?src=/press/press_releases_media_advisories/2011/HUDNo.11-270http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/oe/rpts/rtc/fhartcqtrlyhttp://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/oe/rpts/rtc/fhartcqtrlyhttp://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/oe/rpts/rtc/fhartcqtrlyhttp://business.gwu.edu/files/fha-assessment-report-02-2011.pdfhttp://business.gwu.edu/files/fha-assessment-report-02-2011.pdfhttp://www.gao.gov/new.items/d0624.pdfhttp://www.gao.gov/new.items/d0624.pdfhttp://portal.hud.gov/hudportal/documents/huddoc?id=MMIQtrlyQ2_2012Final.pdfhttp://portal.hud.gov/hudportal/documents/huddoc?id=MMIQtrlyQ2_2012Final.pdfhttp://www.americanprogress.org/issues/housing/news/2012/06/11/11699/the-fha-is-on-board-with-principal-reduction/http://www.americanprogress.org/issues/housing/news/2012/06/11/11699/the-fha-is-on-board-with-principal-reduction/http://www.americanprogress.org/issues/housing/news/2012/06/11/11699/the-fha-is-on-board-with-principal-reduction/http://portal.hud.gov/hudportal/HUD?src=/press/testimonies/2012/2012-04-26http://portal.hud.gov/hudportal/HUD?src=/press/testimonies/2012/2012-04-26http://portal.hud.gov/hudportal/HUD?src=/press/testimonies/2012/2012-04-26http://portal.hud.gov/hudportal/HUD?src=/press/testimonies/2012/2012-04-26http://portal.hud.gov/hudportal/HUD?src=/press/testimonies/2012/2012-04-26http://portal.hud.gov/hudportal/HUD?src=/press/testimonies/2012/2012-04-26http://www.americanprogress.org/issues/housing/news/2012/06/11/11699/the-fha-is-on-board-with-principal-reduction/http://www.americanprogress.org/issues/housing/news/2012/06/11/11699/the-fha-is-on-board-with-principal-reduction/http://www.americanprogress.org/issues/housing/news/2012/06/11/11699/the-fha-is-on-board-with-principal-reduction/http://portal.hud.gov/hudportal/documents/huddoc?id=MMIQtrlyQ2_2012Final.pdfhttp://portal.hud.gov/hudportal/documents/huddoc?id=MMIQtrlyQ2_2012Final.pdfhttp://www.gao.gov/new.items/d0624.pdfhttp://www.gao.gov/new.items/d0624.pdfhttp://business.gwu.edu/files/fha-assessment-report-02-2011.pdfhttp://business.gwu.edu/files/fha-assessment-report-02-2011.pdfhttp://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/oe/rpts/rtc/fhartcqtrlyhttp://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/oe/rpts/rtc/fhartcqtrlyhttp://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/oe/rpts/rtc/fhartcqtrlyhttp://portal.hud.gov/hudportal/HUD?src=/press/press_releases_media_advisories/2011/HUDNo.11-270http://portal.hud.gov/hudportal/HUD?src=/press/press_releases_media_advisories/2011/HUDNo.11-270http://portal.hud.gov/hudportal/HUD?src=/press/press_releases_media_advisories/2011/HUDNo.11-270http://portal.hud.gov/hudportal/documents/huddoc?id=fhamktq3_11.pdfhttp://portal.hud.gov/hudportal/documents/huddoc?id=fhamktq3_11.pdfhttp://portal.hud.gov/hudportal/documents/huddoc?id=FHAMMIFundAnnRptFY11No2.pdfhttp://portal.hud.gov/hudportal/documents/huddoc?id=FHAMMIFundAnnRptFY11No2.pdfhttp://portal.hud.gov/hudportal/documents/huddoc?id=fhamktq3_11.pdfhttp://portal.hud.gov/hudportal/documents/huddoc?id=fhamktq3_11.pdfhttp://portal.hud.gov/hudportal/documents/huddoc?id=fhamktq3_11.pdfhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=1824923http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1824923http://www.corelogic.com/about-us/news/asset_upload_file516_16435.pdfhttp://www.corelogic.com/about-us/news/asset_upload_file516_16435.pdf


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12 C t A i P | Th F d l H i Ad i i t ti S d th H i M k t

28 In last years actuarial report, FHA predicted that the capitalreserve would return to the 2-percent threshold 2014,assuming slight rebound in home prices starting in 2012(along with changes in interest rates and other economicconditions). The underlying model or that projection,prepared by Moodys analytics, assumed a 5.6-percent dropin home prices or 2011 and a 1.2-percent increase in 2012.In reality, home prices ell by just 2.5 percent in 2011 andincreased 1.8 percent in the rst hal o 2012, according tothe Federal Housing Finance Agency. For more, see SarahWartell and John Grith, Too Soon to Sound the FHAAlarm (Washington: Center or American Progress, 2011),available at http://www.americanprogress.org/issues/hous-

ing/report/2011/12/12/10787/too-early-to-sound-the-ha-alarm/.

29 Its unclear how large such a loan would have to be. Beorethe $900 million settlement payment in February, theObama administrations 2013 budget requested $688 mil-lion in Treasury draws to ensure FHAs solvency. To date, FHAstill has not drawn any money rom the U.S. Treasury.

30 For more on the Federal Credit Reorm Act o 1990 andbudget issues acing ederal credit programs, see JohnGrith and Richard Caper ton, Managing Taxpayer Risk:The Federal Government Responsibly Prices and ManagesRisk When Issuing Loans and Loan Guarantees (Wash-ington: Center or American Progress, 2012), availableat http://www.americanprogress.org/issues/economy/report/2012/05/03/11571/managing-taxpayer-risk/.

31 PMI Group, one o the countrys largest private mortgageinsurers, led or Chapter 11 bankruptcy in November 2011ater posting 16 straight quarterly losses. Another majorinsurer, Triad Guaranty Inc., stopped selli ng policies in July2008. See: Dawn McCarty and Steven Church, PMI GroupSeeks Bankruptcy Ater Regulators Take Over Main Unit,Bloomberg Businessweek, November 28, 2011, availableat http://www.businessweek.com/news/2011-11-28/pmigroup-seeks-bankruptcy-ater-regulators-take-over-mainunit.html.

32 According to the Federal Housing Finance Agency, privatemortgage insurers underwrote $193.4 billion in insurance

in 2008, the rst year ater the housing bust. That was theindustrys lowest volume since 2000. See: Federal HousingFinance Agency, State o the Private Mortgage InsuranceIndustry (2009), available at http://www.ha.gov/web-les/14779/MMNOTE_09-04%5B1%5D.pd.
http://www.americanprogress.org/issues/housing/report/2011/12/12/10787/too-early-to-sound-the-fha-alarm/http://www.americanprogress.org/issues/housing/report/2011/12/12/10787/too-early-to-sound-the-fha-alarm/http://www.americanprogress.org/issues/housing/report/2011/12/12/10787/too-early-to-sound-the-fha-alarm/http://www.americanprogress.org/issues/economy/report/2012/05/03/11571/managing-taxpayer-risk/http://www.americanprogress.org/issues/economy/report/2012/05/03/11571/managing-taxpayer-risk/http://www.businessweek.com/news/2011-11-28/pmigroup-seeks-bankruptcy-after-regulators-take-over-mainunit.htmlhttp://www.businessweek.com/news/2011-11-28/pmigroup-seeks-bankruptcy-after-regulators-take-over-mainunit.htmlhttp://www.businessweek.com/news/2011-11-28/pmigroup-seeks-bankruptcy-after-regulators-take-over-mainunit.htmlhttp://www.fhfa.gov/webfiles/14779/MMNOTE_09-04%5B1%5D.pdfhttp://www.fhfa.gov/webfiles/14779/MMNOTE_09-04%5B1%5D.pdfhttp://www.fhfa.gov/webfiles/14779/MMNOTE_09-04%5B1%5D.pdfhttp://www.fhfa.gov/webfiles/14779/MMNOTE_09-04%5B1%5D.pdfhttp://www.businessweek.com/news/2011-11-28/pmigroup-seeks-bankruptcy-after-regulators-take-over-mainunit.htmlhttp://www.businessweek.com/news/2011-11-28/pmigroup-seeks-bankruptcy-after-regulators-take-over-mainunit.htmlhttp://www.businessweek.com/news/2011-11-28/pmigroup-seeks-bankruptcy-after-regulators-take-over-mainunit.htmlhttp://www.americanprogress.org/issues/economy/report/2012/05/03/11571/managing-taxpayer-risk/http://www.americanprogress.org/issues/economy/report/2012/05/03/11571/managing-taxpayer-risk/http://www.americanprogress.org/issues/housing/report/2011/12/12/10787/too-early-to-sound-the-fha-alarm/http://www.americanprogress.org/issues/housing/report/2011/12/12/10787/too-early-to-sound-the-fha-alarm/http://www.americanprogress.org/issues/housing/report/2011/12/12/10787/too-early-to-sound-the-fha-alarm/

the federal housing administration saved the housing market

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