Will FHA Need a Bailout or Not? Who Am I Supposed to Believe?

Over the last month there's been a lot of back and forth on whether the Federal Housing Administration (FHA) is the next agency to need a bailout. Both sides of the argument agree FHA's delinquencies are rising and capital reserves are falling; but disagree on whether its current and future reserves are enough to withstand these rising delinquencies. This debate has me biting my fingernails as over half of my business is FHA loans, but with compelling arguments coming from either side, who do I believe? If you're also trying to wrap your mind around what exactly is going on, here's a breakdown of what FHA skeptics contend, and FHA's defense. Who do YOU believe?

The Facts

1. Congress requires FHA to keep a minimum of 2% of loans insured by the agency in cash reserves
2. FHA has fallen below the 2% minimum. The ratio in 2008 was 3%, down from 6.4% in 2007.
3. FHA currently guarantees about 23% of all home loans originated, up from 2% in 2005
4. Approximately 20% of FHA loans originated in 2008 face serious problems including foreclosure
5. Roughly 7% of all FHA loans are delinquent

What FHA Skeptics are Saying

In last week's testimony before Congress, Edward Pinto, Chief Credit Officer from 1987-89 for Fannie Mae, stated its inevitable for FHA to need a taxpayer bailout within the next 24-36 months. Watch this video of him on Fox News just a couple weeks before the drop below the 2% minimum was confirmed. He makes his case as to why FHA is in such bad shape.

FHA's Defense

FHA commissioner, David Stevens, acknowledges the seriousness of falling below the 2% minimum threshold; but in his testimony before the House Financial Services subcommittee last week he stated FHA will not need a taxpayer bailout. He asserted the capital reserve fund can be replenished within the next three years according to an independent, non-governmental actuarial review of the MMI fund which is based on a conservative estimate of the housing market's future recovery. He states in the video below that this assumes no further catastrophic decline in homes prices:

In this interview Stevens asserts FHA has enough reserves to offset rising delinquencies. Although the capital reserve fund has dropped below 2%, its total reserves are as high as they've ever been.

So who do I believe? Clearly, FHA is strapped, but can it weather the storm? Its concerning to me that Stevens is betting FHA's health a "conservative" recovery in the housing market. Conservative according to who? That seems awfully subjective. The last time the mortgage industry banked on rising home prices didn't turn out too well, did it? Also, FHA's delinquency rate is roughly 7%, does that sound familiar to anyone else?

I'm not trying to be Debbie Downer, God knows if anyone hopes it all works out, its ME! I just hope FHA is prudent in its predictions and underwriting, even if that means tightening its lending standards for the overall health of our economy. Overall, I'm still on the fence on this one, although I am concerned. How about you? Do YOU think FHA will need a bailout?