Department of Veterans Affairs officials realized they were headed for a record year during the summer due to strong refinancing volumes and demand for purchase loans.
“At this rate, it will be our biggest year ever,” VA home loan director Michael Frueh said during an interview in early August.
The prediction was spot on. VA guaranteed 629,300 single-family loans in FY 2013, beating the old record of 600,000 loans made during the huge refinancing boom of FY 1994.
Refinancings averaged 49% of VA loan endorsements during FY 2013, which ended September 30.
When refinancings dipped in late summer, purchase mortgage transactions jumped 23% from third quarter to 98,600 in the fourth quarter.
But the government’s largest low downpayment program didn’t see such a pop.
Preliminary data show the Federal Housing Administration endorsed 180,000 purchase mortgage transactions in the fourth quarter, compared to 181,100 in the third quarter.
And it could be a sign that FHA has pushed its mortgage insurance premiums too high. New borrowers are now paying a 1.75% upfront fee plus a 1.35% annual premium. VA charges a one-time 3% upfront fee.
Over seven years, the cost of FHA loan is three times higher than a VA loan, according to mortgage consultant Brian Chappelle.
Meanwhile, FHA lenders originated 272,163 single-family loans in the fourth quarter of FY 2013, compared to 356,000 in 3Q.
The 23.5% decline in FHA endorsements compares to a 12% decline in VA loan production. VA lenders approved 146,600 loans in the fourth quarter compared to 166,200 in the prior quarter.
Costs might account for the difference in VA and FHA loan production. On a $200,000 FHA-insured loan, the monthly premium can be $225. On a VA loan it is zero. For borrowers who can qualify for a privately insured loan conventional loan, the monthly premium can be around $100.
FHA commissioner Carol Galante recently told a congressional panel that her agency is trying to ensure access to credit while recapitalizing the FHA mortgage insurance fund.
“With interest rates rising, it is possible that we have reached the tipping point with respect to premiums,” she said during an Oct. 29 hearing. “We must assess whether FHA premiums are set appropriately for risk to the fund without making the cost prohibitive for qualified borrowers.”
FHA is expected to release its annual actuarial report in December, which projects the future performance of the FHA insurance fund. It also gages the FHA’s current capital ratio, which has been below 2% for several years.
Overall, FHA endorsed 1.3 million loans in FY 2013. This included 696,400 purchase mortgages, compared to 733,700 purchase loans in the prior fiscal year.
At the same time, FHA is facing a runoff problem where its best borrowers are jumping to other loan programs.
During the first three quarters of FY 2013, FHA experienced 823,000 prepayments and only 37% of the borrowers refinanced back into a FHA-insured loan.
Total FHA loan production was “fine but the size of total portfolio shrunk because of the runoff,” Chappelle said, which reduces FHA’s revenue. The co-founder of Potomac Partners noted these borrowers have the credit scores and financial resources to qualify for less expensive conventional loans.
Over the past year, FHA has seen improvement in terms of delinquencies and claims paid on bad loans. However, runoff is the new concern, Chappelle said. The concern is “that the good loans are running off too quickly.”
Meanwhile, Fannie Mae and Freddie Mac are starting to see a pickup in mortgage purchase activity.
In the third quarter, Fannie acquired $69.5 billion in mortgages, up from $52.5 billion in second quarter and $37 billion in first quarter of calendar year 2013.
Freddie acquired $84 billion in home purchase loans during the first three quarters—the highest level since 2009—including $34 billion in third quarter.