Federal Housing Administration (FHA) has not needed a direct recapitalization from Congress since its founding over three-quarters of a century ago. However, it is highly likely, given FHA’s current condition. FHA’s present state is precarious. For the past two years, it has been in violation of its most important capital reserve regulation, under which it is supposed to hold sufficient reserves against unexpected future losses on its existing insurance-in-force. To be barely compliant with this rule would have required just over a $12 billion capital infusion in fiscal year 2010, and that presumes that future losses are not being underestimated by FHA. This report suggests that they are by many tens of billions of dollars, so that the recapitalization required will be at least $50 billion, and likely much more, even if housing markets do not deteriorate unexpectedly.
Rather than requesting that Congress strengthen its capital resources as the housing bust deepened, FHA decided to pursue a strategy of growing out of its problems beginning in 2008. Aggregate insurance-in-force more than tripled since then, from $305 billion at the end of the 2007 fiscal year to just over $1 trillion according to the latest data available from July 2011.2This is nearly 7% of aggregate national output for the United States, so the potential pool of risk now is very large. FHA has not increased its capital resources commensurately. In fact, it has more than doubled its own operating leverage in recent years, as there is less than half the capital backing each dollar of insurance guarantee than there was only a few years ago. Unless one believes that the risk of the mortgages it insures has declined substantially, FHA has become a much riskier organization.