Should FHA Adopt VA Model and Cut Insurance Coverage?

The Department of Veterans Affairs has run a successful single-family program by guaranteeing 25% to 50% of the loan amount and the Federal Housing Administration could adopt a similar structure to restore its program back to financial health, according to a Basil Petrou, a financial consultant.

Reducing the 100% guarantee on FHA-insured loans down to 30%—where the lender is at risk for deeper losses—would discipline underwriting, reduce losses and provide an avenue for recapitalizing the FHA Mutual Mortgage Insurance fund, Petrou told the House Financial Services Committee Wednesday morning.

“Cutting the level of insurance coverage on future FHA loans while holding the FHA premium at its current level would recapitalize the FHA fund,” Petrou testified.

The FHA fund has exhausted its capital and 9.5% of FHA-insured loans are seriously delinquent. The VA serious delinquency rate is half the FHA rate. Since 2009, the serious delinquency rate on VA loans is slightly below the rate on comparable prime loans.

The Federal Financial Analytics managing partner also noted that the 100% FHA guarantee is a barrier to the re-entry of private capital into the mortgage market.

House Financial Services Committee chairman Jeb Hensarling, R-Texas, said FHA is “flat broke” and he is looking for ways to reform FHA and bolster private sector lending. But Hensarling did not endorse any specific changes suggested at Wednesday’s hearing.

“Given their high loan-to-value, low credit score policies and high rates of default, it is an open question whether FHA has now morphed into Countrywide. Arguably, the FHA has now become the nation’s largest subprime lender—all with the blessing of the administration,” he said. Next week, FHA commissioner Carol Galante is scheduled to testify before the committee.