The Truth About FHA’s Reserves

Contrary to what many sources are reporting the FHA insurance pool is not at this point where they will need a government bailout. And it is unlikely they will need a bailout in the forseeable future. What most people don’t realize FHA is the only agency of the Federal Government that actually makes money.

The recent audit of FHA showed the mutual insurance pool had a balance of only .57% of the outstanding loans, well below the Congressional mandate of 2%. Unfortunately this is the only part of the audit that most people look at. Even the auditors state that it is highly unlikely the insurance pool would run out of funds.

The biggest item that everyone seems to want to over look is the .57% is only the “Capital Reserve Fund”. FHA also holds a “Financing Account.” When you add the funds in both accounts it totals $31 billion which is actually 4.5% of the outstanding loans. Twice what is mandated by Congress.

There are people saying that we need to go to a 5% down payment and a 3% annual MIP premium. On a $200,000 loan buyers would have to come up with $3000 in additional down payment and the monthly mortgage insurance would go from $91.66 to $500. These proposals are absolutely ludicrous because it would force most buyers out of the FHA market.

FHA has already taken the steps that are needed. Through their changes in the underwriting guidlines they have been able to raise the average credit score from 633 to 693. The other major step was the elimination of the non-profit down payment assistance programs which had a default rate of 20.6%. FHA has taken the proper steps and a little patience will prove that FHA is moving in the right direction and that they will play a crucial part in bringing this country out of the recession.