FHA Gives up billions to US Treasury | HotPads

FHA Gives up billions to US Treasury

Peter G. Miller

Can you name a federal agency that has banked more than $13.5 billion in mortgage insurance profits during the past few years?

If the Federal Housing Administration does not spring to mind you're not alone, but the fact is that HUD has taken billions in FHA premiums and given it to the U.S. Treasury. Rather than rebate profits back to borrowers - the traditional FHA practice - HUD has turned surplus mortgage insurance premiums into de facto tax payments and used the money to reduce the federal deficit.

Treasury Windfall

While most of us figure our income according to the calendar year, the federal government determines its income and expenses according to the "fiscal" year, the period between October 1st of one year and September 30th of the next. Right now, for example, the government is operating in fiscal 2008, the accounting year that began last October.

According to official HUD records, in the seven-year period from fiscal 2001 through fiscal 2007 a total of $13.5 billion was turned over to the Treasury from the FHA program. This is money that was not rebated to borrowers and not retained in a reserve to protect against future losses.

Not only did the FHA pay-out $13.5 billion to the Treasury it also gave up the interest which it might have accumulated from such funds.

During the period from 2001 through 2007, the interest rate associated with Treasury bills varied from nearly 6 percent to as little as 1.2 percent according to HSH Associates, a financial publisher.

If the typical rate for Treasury bills was 3.6 percent from 2001 through 2007, then not only did HUD give up $13.5 billion in borrower premiums, it also lost interest. (6 percent less 1.2 percent = 4.8 percent. 4.8 percent divided by 2 = 2.4 percent. 2.4 percent plus 1.2 percent = 3.6 percent)

How much Interest?
If you calculate the future value of money for each year, then at 3.6 percent annually the total is another $2.6 billion that could have been earned by investing in T-bills.

In total, HUD turned over the equivalent of $16.1 billion in borrower premiums to the U.S. Treasury ($13.5 billion plus $2.6 billion).

FHA Profits & Interest

Fiscal Year:
Loans Originated:
Returned To Treasury:
Interest Lost:






2005 523,243




Sources: HUD, FHA, Mortgage Insurance Companies of America

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 , 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? MBr/>
One choice would be to restore the rebate system which has historically been part of the FHA program.

A second option would be to reduce FHA premiums, thus making the program more affordable and supporting the basic FHA effort to enlarge homeownership opportunities. During the past seven fiscal years the FHA endorsed 6.2 million loans and gave up the equivalent of $16.1 billion - that's more than $2,500 per loan.

A third choice would be to enlarge the reserve fund. Even though the reserve fund is several times larger than necessary, private-sector reserves have proved inadequate in many cases to handle massive mortgage losses. A larger FHA reserve fund would also produce more interest income for the program, again increasing reserves.

But given today's foreclosure crisis there's still-another choice: Give less to the Treasury and use the money to underwrite efforts on Capitol Hill to refinance toxic loans with $300 billion in FHA-insured mortgages.

One worry about the proposal is that it would produce operating losses for the FHA. To off-set those losses it has been proposed that Fannie Mae and Freddie Mac should pay 4.2 cents for each $100 worth of mortgages that they purchase or securitize. According to the Congressional Budget Office, such a fee would not only cover anticipated FHA losses it would actually produce an $800 million profit over ten years.

But why create a fee when Fannie Mae and Freddie Mac are reporting massive losses? Instead, why not obligate the Treasury to give back 50 percent of the premium money received in the past few years? Had HUD not given away $16.1 billion the FHA reserve fund would now hold $37 billion - more than enough to cover all anticipated claims from regular operations as well as the proposed FHA rescue bill.

____________________ Peter G. Miller is the author of the Common-Sense Mortgage and is syndicated in more than 100 newspapers.
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