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Feature SECONDARY MARKET Or ig i nat ion Will the FHA Stay Afloat? As the Fed continues to answer for its recent projections, legislators are calling the FHA's plans to avoid a bailout into question. T he secretary of the Department of Housing and Urban Development, Shaun Donovan, faced the Senate Banking Committee to defend the Federal Housing The M Report | 77 se c on da r y m a r k e t SIDENOTE Administration's (FHA) housing decisions and plans to avoid a bailout. Arguing that factors such as home prices, which have improved since the FHA's last projections, are mitigating the downsizing effect of low rates, Donovan acknowledged that funding from Treasury may be required, stating that the agency won't have a clearer picture until the president's budget is released. The answer provided little comfort for the committee, which pointed out that the assumed "worst case scenario" interest rates used in the FHA's actuarial report are actually higher than current rates. Interest rates have had an estimated negative impact of roughly $10 billion. Presenting his testimony, Donovan backed the FHA's role in the market and supported the agency's steps thus far. However, A na ly t ic s changes, the industry will likely spend 2013 watching—and waiting—for recovery to accelerate in a more meaningful way. s e r v ic i ng marketplace agrees with the assertions. Following the release of the most recent Flow of Funds, Safe Haven's Doug Noland conveyed his own theory regarding the report, taking a more pessimistic tone over what he called the "government finance bubble." "The profound role fiscal and monetary stimulus has had on bolstering incomes, spending, corporate earnings, and asset prices is fundamental . . . With federal government liabilities in an historic inflationary cycle, there's at this point a significantly reduced need for the traditional workings of the U.S. financial sector," Noland concluded. But no matter the thesis, one question looms for all industry professionals—and that's "when?" Whether future momentum results from the "wealth effect" or significant regulatory and structural recent findings disputing Donovan's position have many analysts, policymakers, and trade groups speculating about the likelihood of an imminent Treasury draw to keep the FHA alive. In an annual report issued to Congress in mid-November, HUD revealed the capital reserve ratio of FHA's Mutual Mortgage Insurance (MMI) Fund had fallen to -1.44 percent (representing -$16.3 billion) based on data from an independent actuary. In response, Donovan noted the actuarial report assumes no new business will be added to the FHA's books and that the agency will take no steps to improve its financial position. Commenting on the FHA's prevention strategy—which includes raising premiums slightly, removing cancellation on premiums for new loans going forward, and revising its loss mitigation strategies—Donovan emphasized his belief that the FHA is struggling under excessively high loan limits, an obstacle he feels HUD is powerless to overcome on its own. Where HUD needs help, Donovan noted, is in legislation. He argued that the agency needs enhanced enforcement authority to recover money lost. "We support our loan limits coming down, and they were supposed to expire last year. Congress made the decision to lower the GSEs' loan limits but kept the FHA's higher level," Donovan said. He also remarked that, given Congress' decision to extend the higher limits, he felt HUD could not act on its own to bring them down. "We think with a set of changes that we are already taking . . . those alone could add about $3 billion to the fund over the next couple years," Donovan concluded.