Marc Guzman's West County Blog

According to HUD’s annual audit of the Federal Housing Administration (FHA), there is a 50-50 chance that FHA will need a bailout from taxpayers in the next 12 months.  HUDs report stated that FHA’s cash reserves have fallen to $2.6 Billion, down from $4.7 Billion the year before.

Now what is the important item to note here?  Per federal statute, FHA is required to have a minimum capital reserve of at least 2.0%.  The $2.6 Billion in cash reserves puts FHA’s capital reserves at a mere 0.24%.  FHA is operating at a very dangerous level.  Right now it is up in the air as to what will happen with FHA in the near future.  If home values increase next year, FHA will be able to recover and bring it’s cash reserves above the 2.0% requirement.  But if home values drop even 9% in 2012, FHA would need an estimated $13 Billion bailout from taxpayers.  I will let you make your own guess as to what may happen next year with over 6 Million loans in default and hundreds of analyzers predicting housing values will drop 5-15% next year.

So if we are really at a 50-50 chance of FHA needing a taxpayer bailout, why then increase the loan limit from $625,000 to $729,750? The increase in FHA’s loan limit would allow it to increase its market share, thus decreasing the cash reserves even more.  Going in that direction may make it a 75-25 chance a bailout will be needed because many of the higher-end housing markets are losing value.