The Federal Housing Administration announced that its reserves might not be able to cover projected losses, raising the prospect that the agency could ask for a taxpayer injection for the first time in its 78-year history. Here’s a look at the issue:

The FHA reported on Friday that its annual audit shows that the agency doesn’t have enough in reserve to cover expected losses, leading to a $16.3 billion net worth deficit. Is the FHA broke?

The FHA had reserves of $30.4 billion as of Sept. 30, according to estimates by its independent actuary. The report looks at what would happen if the FHA didn’t write any new business and then it makes assumptions about home prices and interest rates, projecting how much money the FHA would have to pay to cover any losses over the 30-year life of those loans. The report says that the current loans, under a base case economic scenario, will lose around $46.7 billion. That means the FHA isn’t out of money today, but they won’t have enough money to pay those claims.

“What it’s saying is that if you ended the FHA program today, they would need a Treasury draw. They do not have enough capital,” said Thomas Lawler, an independent housing economist in Leesburg, Va.

There’s a lot of talk about an FHA “bailout”? How does the government bail out its own agency?

The government doesn’t actually have to go to Congress and ask for money. The FHA has what’s known as “permanent and indefinite” budget authority, meaning that it can simply receive a direct appropriation from Treasury to cover any losses. The bailout term arises from the fact that this particular agency has never had to rely on taxpayer money to cover losses.

When could that happen?

The White House’s Office of Management and Budget will produce its own forecast of the FHA’s finances when it releases the president’s annual budget next February. At some point later in the year, and no later than September, the FHA could submit a request to the Treasury to move money into its reserve accounts.

The FHA is required to have enough cash in its reserves to pay for anticipated losses, so even though the FHA has some $30 billion in reserves, it would have to take money from the Treasury if the OMB found that the FHA were expected to lose more money than whatever it had on hand.

Obama administration officials say that the agency will take steps to prevent any Treasury infusions. How is that possible?

The FHA could make a series of changes to charge more money for loans that it guarantees in a bid to boost revenues and increase the projected value of new business. It could also announce new legal settlements with banks, new changes in how it will handle a growing inventory of more than 730,000 defaulted mortgages, and other steps.

Will FHA loans become more expensive for borrowers?

Yes. The FHA will raise annual insurance premiums by 0.1 percentage point, following a series of earlier fee hikes. The FHA will also revamp its program so that borrowers will have to pay mortgage insurance over the life of their loan. Currently, borrowers no longer have to pay insurance after certain thresholds are met. For a 30-year fixed-rate loan, for example, annual fees aren’t collected after five years and after borrowers owe no more than 78% of their property’s value.

The FHA is also planning to revamp its reverse mortgage program, which could reduce the amount of money that seniors can borrow.

How did the FHA become such a big player in the market?

The agency didn’t relax its standards during the go-go days of the subprime bubble, and it lost market share to the private sector. But once the subprime market disintegrated in late 2007 and then when Fannie Mae and Freddie Mac tightened up their standards in 2008, the FHA faced a glut of new business—largely from borrowers and communities that had been served by the subprime mortgage market. It is likely to sustain huge losses on those mortgages.

The FHA was also shut out of many of the most overheated housing markets in 2006 and 2007 because of loan ceilings that varied by county. In Los Angeles County, for example, the FHA couldn’t guarantee loans that exceeded $362,790, at a time when many houses were selling for far more than that. In March 2008, Congress and the Bush administration raised those loan limits, allowing the FHA to reach a much larger share of the market.

The FHA has played a major role in the market since then because there is little private capital willing to make loans with down payments of just 3.5%. Officials in recent years have struggled with calibrating the balance between protecting taxpayers and keeping housing credit flowing, and that struggle is only going to become more acute amid rising calls now for the FHA to retrench.

Existing Home Sales "Pop", Prices Jump 11%: 

U.S. home resales rose in October and a gauge of homebuilder sentiment climbed to a six-year high in November, a sign the housing sector is continuing to gain traction.

The National Association of Realtors said on Monday that existing home sales climbed 2.1 percent last month to a seasonally adjusted annual rate of 4.79 million units, beating forecasts by Wall Street economists.

The data suggests America's recovery from the 2007-09 recession is becoming increasingly self-sustaining, with job creation helping drive home sales, which in turn are supporting economic growth.

In October, the median price for a home resale was $178,600, up 11.1 percent from a year earlier as fewer people sold their homes under distressed conditions compared to the same period in 2011. Distressed sales include foreclosures.

The nation's inventory of existing homes for sale fell 1.4 percent during the month to 2.14 million, the lowest level since December 2002. At the current pace of sales, inventories would be exhausted in 5.4 months, the lowest rate since February 2006.

In a separate report, U.S. housing starts rose to their highest rate in more than four years in October, the Commerce Department said housing starts increased 3.6 percent to a seasonally adjusted annual rate of 894,000 units -- the highest since July 2008. 

   Los Angeles Times

New short-sale program offers relief for underwater homeowners
One of the federal government’s most-important financial relief efforts for underwater homeowners started operating Nov. 1.

Making sense of the story

• Traditionally short sales, where the lender agrees to accept less than the full amount owed and the house is sold to a new purchaser at a discounted price, are associated with extended periods of delinquency by the original owner.  The new Fannie-Freddie program breaks with tradition by allowing short sales for owners who are current on their payments but are encountering a hardship that could force them into default.

• Eligible hardships under the new program run the gamut: Job loss or reduction in income; divorce or separation; death of a borrower or another wage earner who helps pay the mortgage; serious illness or disability; employment transfer of 50 miles or greater; natural or man-made disaster; a sudden increase in housing expenses beyond the borrower’s control; a business failure; and “other,” meaning a serious financial issue that isn’t one of the above.

• Homeowners who participate in this new program should be aware that although officials at the Federal Housing Finance Agency – the agency that oversees the program – are working on possible solutions with the credit industry at the moment, it appears that borrowers who use the new program may be hit with significant penalties on their FICO credit scores – 150 points or more.

• Other factors to consider are promissory notes and other “contributions.”  In the majority of states where lenders can pursue deficiencies, Fannie and Freddie expect borrowers who have assets to either make upfront cash contributions covering some of the loan balance owed or sign a promissory note.  This would be in exchange for an official waiver of the debt for credit reporting purposes, potentially producing a more favorable credit score for the sellers.

Finally, participants should be aware of second-lien hurdles.  The program sets a $6,000 limit on what second lien holders – banks that have extended equity lines of credit or second mortgages on underwater properties – can collect out of the new short sales.  Some banks, however, don’t consider this a sufficient amount and may threaten to thwart sales if they cannot somehow extract more.

Consumer Sentiment Hits Five Year High: 

U.S. consumer sentiment rose to its highest level in more than five years in November as consumers felt more optimistic about employment prospects and the outlook for the overall economy, a survey released on Friday showed.

The Thomson Reuters/University of Michigan preliminary reading on the overall index on consumer sentiment came in at 84.9, up from 82.6 the month before.

"More consumers expected good rather than bad times financially in the economy in early November, not only for the year ahead but over the next five years as well," survey director Richard Curtin said in a statement.

"This was the most positive outlook for the overall economy in more than five years," he said.

What is the number one factor for housing demand?  Is it a low interest rate?  Is it location, location, location?  Is it low home prices?  No, the number one factor that drives housing is how a consumer feels about their current and future financial situation.  So, it is great news for the housing market that Consumer Sentiment has hit a five year high. 

   Los Angeles Times

Potential borrowers eager to find lenders with superior service
A poll by Carlisle & Gallagher Consulting Group found that more than a third of potential borrowers would be willing to pay a higher rate if the mortgage came with superior service. The survey didn’t say how much more the 34 percent were willing to pay, but it did find that this group is a frustrated bunch.

Making sense of the story

• More than half think the process is too slow.  A third find it impossible to track the status of their loan application, an equal percentage say it is too difficult to talk with their lenders, and a quarter don’t believe the advice they’re given.
  
   
• A starting point for borrowers is to ask their real estate agent which lenders offer the best service.  Agents know which lenders keep their promises and close quickly without incident. Another option is to ask friends, co-workers, and relatives about their experiences.
  
   
• Beyond that, prospective borrowers should look for several attributes that will help them find a responsible company or accessible loan officer.
  
   
• Borrowers should look for a consistent point of contact.  Federal regulators have already settled on this as a requirement for loan servicers – the companies that collect payments, disburse funds to cover property taxes, and homowners insurance and otherwise administer loans.
  
   
• Dealing with a company that provides up-to-date status information also is beneficial.  There’s nothing worse than chasing down an unresponsive loan officer to make sure this document or that report has been received, or to find out whether underwriting has looked at the application.

   San Francisco Chronicle

Principal relief for stressed homeowners:

A limited number of underwater homeowners in California will soon be able to get principal reductions of up to $100,000 apiece on Fannie Mae and Freddie Mac loans through the federally funded Keep Your Home California program.

Making sense of the story

• Although the federal agency that oversees Fannie and Freddie had previously refused to allow permanent principal reduction on loans they own or guarantee, in mid-September, the Federal Housing Finance Agency told servicers they could immediately begin accepting money for principal reductions from programs financed by the U.S. Treasury’s Hardest Hit Fund, including Keep Your Home California.
  
   
• The California Housing Finance Agency set up four programs under the Keep Your Home name to distribute California’s Share of the funds -- $1.9 billion.  It allocated $772 million to principal reduction – enough to help an estimated 9,000 borrowers.
  
   
• To qualify for the principal reduction in California, homeowners must live in the home, owe more than it is worth, be of low-to-moderate income, and be delinquent or have some hardship that puts them in imminent risk of default.
  
   
• The balance on the first mortgage cannot exceed $729,750.  Other rules apply, but there is no asset limitation.  The maximum reduction is $100,000 per homeowner.
  
   
• For more information on the Keep Your Home programs, visit http://keepyourhomecalifornia.org/.

Seven Straight Months Of Price Increases: 

The S&P/Case Shiller composite index of 20 metropolitan areas gained 0.5 percent on a seasonally adjusted basis, in line with economists' forecasts. On a non-seasonally adjusted basis, prices fared better, gaining 0.9 percent.  Prices in the 20 cities climbed 2 percent year-over-year, topping expectations for a 1.9 percent increase.

It was the seventh straight month of increases, extending the longest continuous string of gains since prices were boosted by the homebuyer tax credit in 2009 and 2010.

The sustained good news in home prices "makes us optimistic for continued recovery in the housing market," David Blitzer, chairman of the index committee at S&P Dow Jones Indices, said in a statement.

"Even as we end the seasonally strong home buying period, the statistics are positive," said Blitzer.