Housing agency reports record financial cushion as it braces for market downturn

A federal housing agency on Tuesday said its financial reserves have reached record levels and that it was well positioned to weather a mortgage-market downturn.

The audit, released by the Federal Housing Administration on Tuesday, likely gives officials room to trim mortgage costs over the coming months as part of a push by the administration to address housing affordability.

Low interest rates in 2020 and 2021 and a shortage of new construction pushed home prices to record highs. While prices are expected to continue to ease from their springtime highs over the coming months, they remain elevated and interest rates have more than doubled.

"FHA right now is in excellent shape financially," said Julia Gordon, the agency’s commissioner, in an interview ahead of the report’s release. "We feel well prepared to navigate whatever lies ahead."

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The FHA, which caters to first-time home buyers and borrowers with lower credit scores, said its insurance fund’s net worth at the end of September was $141.7 billion, up roughly $42 billion from a year earlier. Its capital reserve ratio, which by law is required to stay above 2%, now stands well above that figure at 11%. The ratio measures how much in reserves, as a proportion of its loan guarantees, the FHA would have on hand after covering expected losses.

The FHA doesn’t issue mortgages but insures lenders against losses. Borrowers can pay for insurance on mortgages with down payments of as little as 3.5%.

It is unclear how much the FHA would cut premiums charged for the loans they insure, but a reduction is a priority of industry groups and consumer advocates. Industry officials are asking for cuts that would save new borrowers $50 to $70 a month, The Wall Street Journal reported in July.

Ms. Gordon said the FHA would consider a reduction in pricing once a federal budget is set for the full fiscal year, which began on Oct. 1. A stopgap spending measure funds the government until mid-December.

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The potential move has already drawn opposition from Republican lawmakers who say any cuts to mortgage costs could backfire in a manner that could put homes out of reach for the prospective FHA buyers.

"At a time of record-high housing costs, mortgage insurance premiums cuts would further spur demand and increase home prices while putting taxpayers on the hook for bad credit risk," Pennsylvania Sen. Pat Toomey, the ranking GOP member of the Senate Banking Committee, said earlier this year.

For years, a large shortage of entry-level homes was exacerbated by robust home-buying demand because of record-low mortgage rates and the Covid-19 pandemic, which stoked city-dwellers’ desire to escape cramped living quarters for more spacious suburban homes.

More recently, though, rapidly rising mortgage rates boosted borrowing costs for prospective home buyers and pushed many out of the market. Home sales dropped for an eighth straight month in September.

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. The June reading was the lowest in decades.

The FHA said its program is emerging from the pandemic in strong financial shape because of the success of emergency programs designed to help borrowers who faced economic hardship, such as a job loss when the economy shut down in March 2020. The programs include the expanded use of forbearance, which allowed borrowers with federally backed mortgages to temporarily skip payments and make them up later.

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In this past fiscal year, the FHA roughly halved the number of seriously delinquent borrowers in its portfolio to less than 5%, the agency said. At the same time, stress tests showed that the program’s capital buffers would remain more than three times above their statutory levels should markets sour as they did in 2007, when unemployment spiked and the mortgage market cratered.

"It says quite a lot about how effective policy makers were in minimizing the impact of a global pandemic," said Jim Parrott, a former Obama administration housing adviser who now serves as an industry consultant. "They’ve managed to come through what should have been a devastating body blow to the FHA insurance fund healthier than they have been in living memory."

—Nicole Friedman contributed to this article.