The Federal Housing Administration single-family program may be turning the corner. Despite a huge portfolio of seriously delinquent loans, it appears FHA might be able to keep its head above water this year without seeking a draw from the U.S. Treasury.
But it probably won’t escape another round of legislative reforms if House Republicans have their way.
FHA commissioner Carol Galante told the House Financial Services Committee last week that FHA has raised its insurance premiums five times since 2009. And the agency is implementing new measures to reduce losses—such as requiring manual underwriting for borrowers with low credit scores and high debt-to-income ratios.
These changes are “designed to reduce the likelihood that FHA will need to draw on Treasury assistance at the end of fiscal year 2013,” she testified.
But there are too many doubters and a government watchdog unit has given them more ammunition to pursue reforms and downsize the FHA program.
FHA has not met its statutory 2% capital requirement since 2009, according to a new report by the General Accountability Office.
“Further, a weakening in the performance of FHA-insured mortgages has heightened the possibility that FHA will require funding from the U.S. Treasury to help cover its cost on insurance issued to date,” GAO said.
GAO placed FHA on it “high risk” list of troubled government programs.
House Financial Services Committee chairman Jeb Hensarling, R-Texas, said FHA’s designation as a high risk is not surprising. “We know the FHA is broke and is quickly approaching bailout-broke,” Hensarling said.
His committee has held two hearings on FHA this month and he wants to schedule more.
In commenting that FHA is broke, Hensarling points to the annual FHA actuarial report that projects possible loan losses over the 30-year life of the loans.
The FY 2012 annual actuarial report shows FHA has a negative economic value of $16.3 billion and a negative 1.44% capital reserve ratio.
But the independent auditors working on the FY 2012 report didn’t anticipate the strong upward trend in house prices that began last spring.
They also assumed refinancings would reduce FHA revenue because borrowers will take out conventional loans.
However, FHA is refinancing 50,000 existing FHA borrowers a month partially due to a special streamline refi program the agency launched last June for borrowers with pre-June 2009 FHA loans.
FHA refinancings totaled $32.7 billion in the fourth quarter, compared to $15.4 billion in the same quarter of 2011, according to a FHA report on December loan activity.
A few weeks ago, the Congressional Budget Office updated its estimates of federal revenue and deficits, which included an unexpected increase in FHA revenue.
Since releasing its August 2012 estimate, CBO noted that FHA receipts were $4 billion higher than initially estimated.
FHA ended fiscal year 2012 (Sept. 30) with $3.3 billion left in its capital reserve account, down from $4.7 billion in FY 2011.
“The fact that MMI Fund ended the fiscal year with this balance is due primarily to policy changes made during FY 2012 that substantially improved the value of the fund,” Galante told the committee. FHA also has $35 billion in cash and investments.
On April 1, FHA will raise its annual premium again. On a standard FHA loan, new borrowers will pay a 135 basis point annual premium and a 175 basis point upfront fee.
The FHA books of business since FY 2009 are high quality and generating high revenue for FHA, according to mortgage consultant Brian Chappelle. “FHA is endorsing the best loans in its history,” he said. The average credit score on a FHA is nearly 700.
But FHA still has 734,650 seriously delinquent loans in its portfolio. And the independent auditors estimate FHA will have to pay out $60 billion in claims by the end of FY 2014. Most of those claims are on loans originated in FY 2007 through FY 2009.
So many Republicans lawmakers are skeptical that FHA can cover those loan losses without Treasury’s help.
Rep. Randy Neugebauer, R-Texas, complained that HUD keeps claiming that FHA is in recovery and getting better. “Yet the facts don’t prove that out and each year the projections are missed.”