There has been a lot of recent news about FHA Commissioner David Stevens announcing that the FHA may see its 2% capital reserve requirement fall below the minimum level set by Congress.
The concerns of unemployment, combined with the gaining FHA market share are certainly factors that would lead most industry professionals and politicians to question whether or not we’re leaning towards another massive “bank” bailout of the FHA.
However, as posted by Tony Gallegos, The Mortgage Cicerone, there is more to the story than the media is disclosing:
Received additional information today directly from FHA Commissioner David Stevens about his speech last Friday concerning the FHA Reserve Fund. Actually, I should say the FHA Reserve FUND(S) (as in plural).
The big FHA news last week was the the five mortgagee letters released and Commissioner Stevens’ announcement concerning the FHA Capital Reserve Fund. As noted in my September 18th post, the Commissioner affirmed the agency insurer will most likely see its 2% capital reserve requirement fall below the minimum level set by Congress. However, what every media report I read neglected to disclose is that the FHA actually maintains two reserve accounts to address and pay expected losses.
While we have been hearing about the Capital Reserve account, nothing has been articulated about the FHA Financing account. The FHA Financing account was established to reserve funds for expected FHA losses over the next thirty years and the Capital Reserve account is a residual account over and beyond the Financing account. In addition, these two accounts hold in excess of $30 billion. In fact, Commissioner Stevens recently ordered a large portion of the Capital Reserve fund transferred to the Financing account, thus causing the level of the Capital Reserve fund to approach the 2% level. To provide further clarification, the two funds collectively account for a 5% reserve fund.
Another point that must be clarified; while the FHA reserves funds for projected losses over the next thirty years, FANNIE and FREDDIE only reserve their expected losses for the next twelve months. Since most industry individuals reference the two latter agencies as the industry standard, they failed to discern or communicate this very important distinction.
Commissioner Stevens stressed, he does not expect the FHA to have the Congress appropriate additional funds to cover additional losses.
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Bullets:
- FHA Commissioner Dave Stevens affirmed the agency insurer will see its 2% reserve requirement fall below the minimum level set by Congress.
- To address this issue, Mr. Stevens stated the FHA will tighten its current credit guidelines to uphold its insurance fund and mitigate further fund runoff.
- Commissioner Stevens; “to be clear, the fund’s reserves are sufficient to cover our future losses, so FHA will not require taxpayer assistance or new congressional action.”
- FHA actually maintains two reserve accounts to address and pay expected losses that collectively account for a 5% reserve fee – est $30Billion
- While the FHA reserves funds for projected losses over the next thirty years, FANNIE and FREDDIE only reserve their expected losses for the next twelve months.
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