The Federal Housing Administration (FHA) may have to borrow money from the U.S. Treasury in order to survive, which would be unprecedented. The FHA was created in 1934 and has always been solvent, but it guaranteed too many loans during the recession that fell apart. As a result, the FHA is $16 billion in the red.
The FHA insures lenders in case they incur losses on their loans. The situation is not as dire as the Fannie Mae and Freddie Mac debacle, which cost $137 billion to bail out. Although the FHA requires mortgage seekers to prove they can meet the monthly mortgage fee, there is still a problem: down payments only have to reach 3.5%. This low rate caused lenders to flock to the FHA when private markets dried up. In addition, the FHA, from 2007 to 2009, let home sellers offer “gifts” of down payments to prospective buyers.
Edward Pinto, from the American Enterprise Institute, said that the spike in the FHA’s default rates in poor neighborhoods is “creating a cycle of delinquency, blight and foreclosure.”