FHA Loss Rate Climbing Fast
In their zeal to increase the U.S. homeownership rate, the Bush and Clinton administrations liberalized FHA underwriting guidelines - but now the chickens are coming home to roost.
According to a new independent audit conducted by KPMG LLP, claims paid by the Federal Housing Administration soared by 42% last year to $7.8 billion.
The audit pins some of the blame on the loosening of underwriting standards: "We recognize that economic factors such as home purchase price appreciation and increased unemployment rates have an impact on the default rate. However, changes in underwriting policies may also contribute to the higher default rates."
KPMG notes that since 1995 there have been "numerous changes" to FHA's underwriting policies and procedures, which were designed to increase homeownership opportunities. (The U.S. homeownership rate is at an all-time high.)
The audit found that FHA loans originated in recent years experienced higher default rates than loans made in years prior.
Contractors outside of the Department of Housing and Urban Development perform "post-endorsement technical reviews" (PETR) on new FHA endorsements for quality assurance purposes.
But the KPMG audit questions whether the PETR reviews serve any real purpose. "We performed an analysis of the 2,000 lenders with the highest volume of originations and found no strong correlation between the percentage of PETR poor ratings received by a lender and the lender's early default and claims rates."
Over the past 18 months the General Accounting Office and HUD's office of inspector general have issued reports saying that the FHA needs to improve its risk analysis.
The FHA is busy working on borrower credit score technology called "Technology Open to All Lenders." But the TOTAL automated underwriting scorecard has yet to be fully implemented.
The audit also revealed problems with the FHA's automated data processing systems, saying the agency currently "is unable to efficiently integrate, monitor and control its budgetary resources." The ADP problems are contained in the report under the heading "material weaknesses."
In response to the audit, HUD deputy assistant secretary for finance and budget, Margaret A. Young, said, "Addressing these challenges will continue to be a priority as FHA strives to achieve its goal of becoming an even more high-performing, results-oriented organization that delivers quality products and services."
According to third-quarter delinquency figures compiled by the Mortgage Bankers Association, there are roughly 4.3 million outstanding FHA loans. This government-backed portfolio has a total past due rate of 12.54% and a 90-day past due rate of 2.75%.
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