Home   »   Foreclosure Resource Center   »   FHA Gives Up Billions To U.S. Treasury


Is The FHA In Financial Trouble?
As FHA Commissioner Brian Montgomery just told the National Press Club, “currently, FHA is solvent. In fact, we have a reserve of about $21 billion.”

Premium dollars paid by borrowers with single-family homes go into a reserve pool known as the Mutual Mortgage Insurance Fund or MMI. According to the FHA, federal law says that the MMI must “achieve a capital ratio, a measure of the Fund's economic net worth, of at least 2 percent.”

In fact, FHA reserves — with a capital ratio of 6.4 percent — are more than three times larger than typical requirements despite giving away billions of dollars.

Not only is the FHA reverse fund massive by the usual measures, the FHA program is less risky than many private-sector counterparts. For example, the Mortgage Bankers Association reports in the first quarter of 2008 that “FHA foreclosure starts decreased 4 basis points to .87 percent.” This is a substantially lower foreclosure start rate than subprime loans (6.35 percent for subprime adjustable rate mortgages (ARMs) and 1.8 percent for subprime fixed or prime ARMs (1.55 percent). In addition, it appears that only the FHA program among major loan categories saw foreclosure starts decline in the first quarter.

Premiums & Rebates
“At first it might seem as though the FHA can be compared with a shareholder-owned insurance company but that’s not really the case,” says James J. Saccacio, chief executive officer at RealtyTrac.com, the nation’s largest source of foreclosure information and listings. “The better comparison is with a ‘mutual’ insurance company, a company where the policyholders are also the owners of the company. When a mutual insurance company has surplus earnings the policyholders get a rebate.”

The FHA insures mortgages and collects premiums from borrowers to pay for insurance claims from lenders. Historically, when an FHA loan was paid off a borrower could be entitled to a rebate, depending on what claims had been made against the program.

Seen another way, it was never the intent or purpose of the FHA program to generate revenues for the federal government. Indeed, in a history published by the FHA in 1960, the governmental agency plainly says that “the accumulation of premiums would make the agency self-supporting and possibly provide dividends for mortgagors. The system was similar to that used by private mutual life insurance companies.”

To this day refunds remain available for millions of FHA borrowers. Once paid off, qualified FHA-insured mortgages originated prior to December 8, 2004 are eligible for a refund.

The Hidden Tax
FHA premium money given the Treasury Department effectively converts mortgage insurance charges into tax payments. Not only are such payments well outside the history, intent and published goals of the FHA program, they effectively mask the true extent of the federal deficit. In other words, as big as the deficit has been in the past few years it would be $16 billion larger without money taken from the FHA program.

But are there better uses for the FHA premium dollars given to the Treasury Department?
One choice would be to restore the rebate system which has historically been part of the FHA program.