As the automatic spending cuts known as “sequestration” start, the effects to one of the government agencies most tied to housing, specifically new home construction, the Federal Housing Administration (FHA), are beginning to be revealed.

Currently, approximately 25 percent of purchase money mortgages issued for home purchases involve the use of  FHA  insured mortgages. The budget cuts will have the biggest effect on lenders that don’t have so-called direct endorsement authority.

Staff cuts, “could impact the willingness of some lenders to originate FHA loans that require FHA to approve the insurance as it could take longer for FHA to act,” stated Jaret Seiberg, senior policy analyst at Washington Research Group, a unit of Guggenheim Securities LLC,.

Fewer FHA loan guarantees would also mean lower revenue for the agency. A reduction in lending volume means the agency will not receive funding from the Mortgage Insurance Premium  (MIP) charged at the time of loan origination on all FHA loans. The  upfront fee of 1.75 percent of the loan amount is what funds the agency guarantee against foreclosure losses. This past November, an independent audit of the FHA showed it was on shaky financial ground and could require a cash infusion from the government due to inadequate revenues from MIP as compared to losses incurred by foreclosures of previously issued loans.

Other consequences of sequestration for FHA programs include:

• 75,000 fewer households receiving foreclosure prevention, pre-purchase, rental or other counseling through HUD housing counseling grants.
• Elimination of rental assistance for more than 10,000 very-low income rural residents.
• Forcing public housing agencies to defer maintenance and capital repairs to public housing.
• Preventing state and local communities that receive funding under the HOME Investment Partnerships program from building and rehabilitating 2,100 affordable housing units for low-income families.

The full effects of sequestration on FHA as well as overall government services and potential damage to the general economy will be revealed over the coming weeks and months.