Mystery Over FHA Capital

The biggest mystery hanging over the depleted FHA reserve fund boils down to this: Can the agency raise the upfront MI premium fast enough - and will Congress be disciplined to quickly hike the annual charge to borrowers?

If not, HUD secretary Shaun Donovan and FHA commissioner David Stevens could be headed to Capitol Hill with a tin cup, asking for a first-time-ever tax-payer bailout of the fund, something both men hope to avoid.

Meanwhile, the Obama administration's new budget is officially out with little detail on just how bad off the fund is. At last check, its capital ratio was 0.53% on a book of business that is just shy of $700 billion and growing. (The capital statutory minimum is 2%.) At press time the agency had not provided a yearend update to its actuarial study. And whether president Obama likes it or not, FHA continues to gain market share from Fannie Mae and Freddie Mac. According to figures compiled by NationalMortgage News, in 2009 Fannie, Freddie and FHA had final shares of 43%, 29% and 24%, respectively. Three years ago FHA's share was less than 3%. (See table.)

The situation could be further complicated by the Fed which is slated to stop buying GSE MBS at March 31. It could hurt Fannie and Freddie's ability to provide liquidity, forcing even more business FHA's way.

But it's not just that FHA's share is growing - it's growing on much larger annual volumes and there are growing concerns in the industry that even though Messrs. Donovan and Stevens brag about the improved FICO scores of 2009 borrowers, that in the end last year's book of business may not perform all that better than 2007 and 2008.

Ann Schnare, an economist and partner with Empiris LLC, said the agency is optimistic that its 2009 and 2010 books will perform much better than the prior two years but she's not so sure. Ed Pinto, an independent analyst and sometimes FHA critic, is feeling queasy about the fund, too. "I sort of know what they are saying," he said, "but I think claims on the 2008 book will be closer to 25% and I think claims on the '09 book will be in the upper teens."

Meanwhile, it's no secret that FHA is getting tough with lenders whose past production is resulting in higher-than-normal claim payments. But there could be a backlash. In early January, the HUD office of inspector general said it was taking a closer look at 15 mortgage companies to determine why they had such high rates of problems.

Those 15 companies were served subpoenas, demanding documents and data related to failed loans that resulted in claims paid out by the government insurer. Industry sources tell NMN that thanks to the publicity, some of these lenders have lost their warehouse lines of credit or are in danger of doing so.

"When a government agency humiliates companies in public, there can be consequences with their relationships with third parties," said one attorney close to the situation.