FHA Continues Its Tricky Balancing Between Risks and Availability
The Federal Housing Administration has been tasked over the past few years to reduce the risks to its single-family loan program while still making mortgage credit available for first-time homebuyers. According to its latest audit, it is successfully walking this fine line.
The agency has raised its mortgage insurance premiums five times to cover losses on its huge portfolio of seriously delinquent loans while at that same time improving recoveries on defaulted loans and foreclosed properties.
These actions have reduced early defaults, increased premium revenue and produced better books of business since 2009.
Lenders have tightened their credit boxes too, which has improved the performance of the newer FHA-insured single-family loans.
In fiscal year 2013, only 2% of FHA’s new borrowers had credit scores under 620, compared to 2006 and 2007 when 40% of borrowers had credit scores below 620.
Meanwhile, FHA’s share of originations with credit scores over 680 continued to exceed 50% of all newly underwritten loans for the fourth consecutive year, according to Brian Chappelle, a consultant with Potomac Partners in Washington.
Year-over-year, “there was widespread improvement in all of FHA’s performance indicators,” Chappelle says.
And now FHA is finally benefiting from an improving housing market and rising home prices.
Independent auditors recently reported that the capital ratio of the FHA mortgage insurance fund moved closer to positive territory in FY 2013, but it fell short at a negative 0.11%.
This all bodes well for the future performance of the FHA mortgage insurance fund except for one thing: FHA has over 630,000 loans that are 90 days more past due on its books, down from 738,300 in FY 2012.
Overall, the serious delinquency rate fell to 8% in FY 2013 from 9.6% in the prior year.
However, many of these delinquent loans are caught in lengthy foreclosure proceedings and FHA is not able to dispose of these loans in a timely way to cut their losses.
The auditors expected FHA to pay $38 billion in claims on bad loans during the first three quarters of FY 2013. But actual claim payments totaled $18 billion. FHA had $48 billion in liquid assets to pay claims as of Sept. 30.
While the number of seriously delinquent loans is declining, the new actuarial report released Dec. 13 shows that an indicator of future claims continues to rise.
The auditors estimated that the cumulative claim rate on FHA loans originated in FY 2011 would be 5.6% by FY 2012. By FY 2013, they set the cumulative claim rate at 7.45% for the FY 2011 book of loans.
Nevertheless, the independent auditors reported that the capital ratio of the FHA Mutual Mortgage Insurance Fund rose to a negative 0.11% in FY 2013, up from a negative 1.44% in the prior fiscal year.
The FHA fund’s net worth rose to a negative $1.3 billion from a negative $16.3 billion in FY 2012.
“That is $15 billion improvement” says FHA commissioner Carol Galante. “The health of the underlying fund has improved and now is expected to reach its 2% capital ratio in fiscal year 2015, two years faster than was predicted two years ago.”
Supporters of the FHA were relieved the auditors issued such an optimistic report.
But Republicans on the House Financial Services Committee contend the FHA is still insolvent by $1.3 billion and needs to be restructured.
The new report “confirms what advocates of FHA reform have known for years—that a broke FHA is a broken FHA,” said committee chairman Jeb Hensarling, R-Texas.
Hensarling’s committee approved legislation in July that would raise the FHA downpayment requirements to 5% from 3.5% and gradually reduce the government’s 100% guarantee on FHA loans to 50% over five years.
FHA lenders originated 1.3 million single-family loans in FY 2013 totaling $240 billion. More than half or 702,400 are purchase mortgages and close to 79% of those loans went to first-time and minority homebuyers. These purchase loans have an average loan-to-value ratio of 96%.
These low-downpayment loans are “risky,” according to Edward Pinto, a fellow at the American Enterprise Institute. Every year FHA claims that they have a new “super-doper” book of business, he says, that will perform better than the previous year. But every year the auditors come in and ratchet up the cumulative claim rate on the loans.
FHA has these “rosy scenarios and that gets them by another year with Congress not doing much,” says Pinto. “This is the fifth year in a row they have missed their 2% capital requirement.”
Back in the early 1990s, Congress mandated that FHA maintain a 2% minimum capital ratio.
“One may survive by kicking the can down the road but my experience is the probability of that happening is pretty low,” Pinto says, particularly with a $1.1 trillion loan portfolio.
He maintains that Congress needs to limit FHA’s risk exposure so it can’t insure cash-out refinances or adjustable-rate mortgages. “They have no business doing ARMs,” he says, and the “performance of their cash-out refinances is horrible.”
The AEI fellow also noted the FHA rate and term refinances should be restructured by keeping the payments the same and reducing the term of the mortgage. That will “help people build wealth,” he says. Pinto was a credit risk officer at Fannie Mae during the 1990s.
Overall, the FHA MMI fund is projected to have a positive net worth of $15 billion in FY 2014 and $27 billion in FY 2015 when it will once again will meet its 2% capital ratio requirement.
David Stevens, president and chief executive of the Mortgage Bankers Association said the actuarial report “shows clear improvement over last year” and the FHA Mutual Mortgage Insurance Fund is headed in the right direction.
“FHA continues to play a critical role in the housing market, as the primary provider of credit for qualified first-time homebuyers and those with little money for a downpayment,” says Stevens.