This deterioration is largely due to plunging house prices starting in 2007 and a sizeable share of FHA single-family loans with seller-funded downpayments. Congress banned seller-funded downpayments on FHA-insured loans in late 2008 due to high default rates.
But the independent auditors that prepared the annual FHA actuarial reports revised the claim rates on loans originated after FY 2009 downward, which shows these newer books of business will perform much better and generate needed revenue for the depleted FHA mortgage insurance fund.
In last year’s actuarial report, the cumulative claim rate on the FY 2007 book of business was projected to be 25.72%. In the new audit, the claim rate jumped to 30.5%. Over the life of those FY 2007 loans, FHA will have to pay claims on nearly 31% of the loans.
But the auditors adjusted the cumulative claim rate on the FY 2010 book downward by 50 basis points to 8.24%. The FY 2011 book was adjusted downward by 100 bps to 5.6% and cumulative claim rate on FY 2012 book was adjusted downward by 162 bps to 4.13%.
“There is a clear dichotomy in the performance of pre- and post-housing crisis loans,” according to mortgage banking consultant Brian Chappelle.
“The bad books got worst and the good books got better,” he told NMN.
Overall, the auditor’s report was discouraging. The economic value of the FHA insurance fund dropped to a negative $13.5 billion. And there is a lot of talk that FHA will need a bailout.
However, the auditors are projecting that FHA originations in FY 2012 and 2013 will bolster the FHA insurance fund.
They estimate the economic value the FY 2012 book of FHA loans will be $11.9 billion and FY 2013 book of business will have an economic value of $11 billion. (FY 2013 started Sept. 30.)
These projections “certainly look encouraging,” Chappelle said. In addition, house prices are rising which generally improves loan performance.
If the economy doesn’t take a dive over the fiscal cliff or go into recession, “it looks like FHA won’t need a bailout,” the former FHA official said.