How the Budget Sequester Directly Impacts the FHA

by 03 Mar 2013

As the political showdown over the United States budget deficit continues with the early days of the sequestration, government agencies are beginning to asses the impact of the sudden spending cuts. The Department of Housing and Urban Development (HUD) is one of such entities, and the overall impact from the sequester could negatively affect the Federal Housing Administration (FHA) and contract the housing market recovery by about two percent.

According to a recent news article in Blommberg, HUD is prepared to lay off FHA loan origination and foreclosure counseling staff as a way to deal with the sequester. Although the FHA is already financially constrained due to the massive amount of risk it carries in its mortgage portfolio and its inadequate reserves, it stands ready to issue more guarantees. The problem is that the pace of its approvals could slow down considerably with less staff. With the strict mortgage lending and underwriting conditions in place these days, many first-time home buyers rely on the FHA as a lender of last resort.

FHA Could See Lower Loan Production

The smooth operation and financial stability of the FHA these days has become dependent on a certain loan volume. FHA guarantees are not cheap, and although mortgage originators fret at the higher fees, they are able to stay competitive by offering solutions to applicants who do not meet today's stringent lending requirements. According to FHA Commissioner Carol Galante, the agency is extremely reliant on a steady flow of income from those fees. 

Federal Reserve Bank Chairman Ben Bernanke commented on the overall effect of the sequester as negative for overall income and employment, but this does not mean that the housing market recovery will come to a grinding halt. In fact, should sequestration last beyond March 27, the White House and Congress can come up with ways to keep the recovery afloat at the same time spending cuts continue. One of such measures would be to allow defense cuts to take place first, thereby allowing agencies like the FHA to continue operating without the burden of a reduced budget. 

Certain decisions about the future of the FHA, such as a proposal to raise the down payment requirement on home purchases to to five percent from 3.5 percent, are likely to be influenced by the rolling spending cuts of the sequester. Still, FHA's commitment to mortgage guarantees and the Federal Reserve Bank's ongoing purchase of mortgage-backed securities are expected to continue through the period of sequestration, thereby providing hope in the housing recovery.


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