FHA accepts bailout


Article Highlights

  • The FHA is permitted to count as current capital the present value of its future net earnings.

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  • This seriously overstates the FHA’s true financial condition.

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  • 1 in 8 FHA-insured loans originated between 1975-2011 will suffer a foreclosure.

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  • The FHA does not need any new legislative authority to tell Congress and the taxpayers the true state of its financial condition.

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Today FHA Commissioner and Assistant Secretary for Housing, Carol Galante, announced that the FHA would be “tak[ing] a mandatory appropriation of approximately $1.7 billion on September 30, 2013.”

Under the FHA’s congressionally sanctioned government accounting principles, the FHA is permitted to count as current capital the present value of its future net earnings, something no other financial institution is permitted to do. Even under this creative accounting practice, as of September 30, 2012 FHA was found to have a negative economic worth [negative capital] of -$16.3 billion (which includes both the forward and reverse insurance programs).  This was the fourth consecutive year the FHA had failed to maintain a congressionally mandated capital level of 2%.

This seriously overstates the FHA’s true financial condition.  As reported last week by FHA Watch, the FHA’s estimated net worth at August 31, 2013 under private generally accepted accounting principles (GAAP) was estimated at –$26.68 billion, up from –$30.41 billion in September 2012, and down from –$20.87 billion in September 2011. The FHA’s capital shortfall stands at $47 billion (using a 2% capital ratio) and $67 billion (using a 4% capital ratio applicable to the private sector).

1 in 8 FHA-insured loans originated between 1975-2011 will suffer a foreclosure—a record of failure made worse by the fact that lower-income and minority families have suffered even higher foreclosure rates.  FHA has now grown to over $1.1 trillion in insurance risk-in-force covering nearly 8 million loans.

The Protect Taxpayers and Homeowners (PATH) Act that passed the House Financial Services Committee on July 24, 2013 would mandate the use of private sector GAAP:

Section 253 (b) USE OF GAAP.—Any financial reporting of the FHA, including the preparation of the annual business plan required by subsection (a), the annual budget required in accordance with section 252(a), and any financial statements of the FHA, shall be conducted in accordance with generally accepted accounting principles applicable to the private sector.

Additional concern stems from the fact that lenders are heeding the FHA’s call to once again originate high risk FHA loans to borrowers with as low as a 580 FICO score (see FHA’s Disproportionate Impact: Default by Design in FHA Watch, Vol. 2, No. 9, September 2013).  The PATH Act also has a number of provisions which would help address the FHA’s abusive lending practices.  Provisions include providing each borrower a written statement advising as to the expected likelihood of default and foreclosure based on the borrower’s risk characteristics and mandating the use of a residual income test to determine ability to pay (something the FHA did in its early years and the Veterans Administration continues to this day).

The FHA does not need any new legislative authority to tell Congress and the taxpayers the true state of its financial condition under GAAP, to disclose to  prospective consumers the true nature of the risk their weak underwriting standards pose for America’s low-income and minority families, or to determine a borrower’s ability to pay in a way that protects consumers.

It can and should implement these common-sense reforms today.

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About the Author


Edward J.
  • American Enterprise Institute (AEI) resident fellow Edward J. Pinto is the codirector of AEI’s International Center on Housing Risk. He is currently researching policy options for rebuilding the US housing finance sector and specializes in the effect of government housing policies on mortgages, foreclosures, and on the availability of affordable housing for working-class families. Pinto writes AEI’s monthly Housing Risk Watch, which has replaced AEI’s FHA Watch. Along with AEI resident scholar Stephen Oliner, Pinto is the creator and developer of the AEI Pinto-Oliner Mortgage Risk, Collateral Risk, and Capital Adequacy Indexes.

    An executive vice president and chief credit officer for Fannie Mae until the late 1980s, Pinto has done groundbreaking research on the role of federal housing policy in the 2008 mortgage and financial crisis. Pinto’s work on the Government Mortgage Complex includes seminal research papers submitted to the Financial Crisis Inquiry Commission: “Government Housing Policies in the Lead-up to the Financial Crisis” and “Triggers of the Financial Crisis.” In December 2012, he completed a study of 2.4 million Federal Housing Administration (FHA)–insured loans and found that FHA policies have resulted in a high proportion of working-class families losing their homes.

    Pinto has a J.D. from Indiana University Maurer School of Law and a B.A. from the University of Illinois at Urbana-Champaign.

  • Phone: 240-423-2848
    Email: edward.pinto@aei.org
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    Name: Emily Rapp
    Phone: 202-419-5212
    Email: emily.rapp@aei.org

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