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As it prepares for the market decline, the Housing Agency reports a record financial cushion

On Tuesday, the federal housing agency stated that its financial reserves had reached record levels and it was well-positioned to weather any downturn in the mortgage market.

The Federal Housing Administration released Tuesday’s audit. It likely allows officials to reduce mortgage costs in the next few months as part of an effort by the administration to improve housing affordability.

Record high home prices were caused by low-interest rates in 2020-2021 and a shortage of new construction. Although prices will continue to fall from springtime highs in the months ahead, interest rates are more than doubled and they remain elevated.

Julia Gordon, FHA’s commissioner, stated that FHA is financially sound right now in an interview before the release of the report. “We are well-prepared to handle whatever lies ahead.”

FHA, which assists first-time homebuyers and borrowers with lower credit scores than average, reported that its net worth as of September was $141.7billion, an increase of roughly $42 billion over the previous year. The FHA’s capital reserve ratio, which is legally required to be at least 2%, stands now at 11%. This ratio is a measure of how much FHA reserves it would have after covering the losses expected.

Although the FHA does not issue mortgages, it insures lenders against loss. With as little as a 3.5% down payment, borrowers can get insurance for mortgages.

Although it is not clear how much the FHA will reduce premiums for loans they insure (or what the actual cost would be), industry groups and consumer advocates are keen to see a reduction. According to The Wall Street Journal, industry officials want cuts to save new borrowers between $50 and $70 per month.

Ms. Gordon stated that the FHA would look into reducing pricing once the federal budget for the entire fiscal year has been established. This began Oct. 1. The government is funded until mid-December with a temporary spending measure.

Republican lawmakers have already reacted negatively to the potential move, arguing that any reductions in mortgage costs could backfire and put prospective FHA buyers out of pocket.

“At a moment of record-high housing prices, mortgage insurance premiums reductions would further spur demand, increase home prices, while putting taxpayers on a hook for bad credit risk,” said Pennsylvania Senator Pat Toomey earlier this year.

A large shortage of entry-level homes has been a problem for years. This was due to record-low mortgage rates, the Covid-19 pandemic, and strong home-buying demand. These factors fueled city dwellers’ desire for larger homes in suburban areas.

Recent developments have seen a rapid rise in mortgage rates, which has boosted borrowing costs for potential home buyers and driven many people out of the market. September was the eighth consecutive month of a decline in home sales.

The National Association of Realtors’ housing-affordability index, which factors in family incomes, mortgage rates, and the sales price for existing single-family homes, fell in September to its lowest level since June. This was the lowest reading in many decades.

FHA stated that its program emerged from the pandemic in strong financial condition due to the success of emergency programs, which were designed to assist borrowers in times of economic hardship. Forbearance was expanded to allow borrowers with federally-backed mortgages to temporarily forgo payments and then make them up later.

The agency stated that the FHA had reduced the number of severely delinquent borrowers by roughly half in the past fiscal year to less than 5 percent. Stress tests also showed that the FHA’s capital buffers would be more than three times higher than their statutory levels if markets turn sour, as they were in 2007 when there was a spike in unemployment and the market crashed.

Jim Parrott, an ex-Housing Advisor to the Obama Administration and now a consultant in the industry said that “it speaks quite a bit about how effective policymakers were in minimizing a global pandemic’. “They have managed to get through what should have been an overwhelming body blow to the FHA insurance fund stronger than ever before in living memory.”

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