Premium Increases Do Job and Cut Into FHA Volume

Higher premiums are slicing into FHA's market share. Credit: © auremar - Fotolia.com

The Federal Housing Administration’s mortgage insurance business continues to muddle along despite hiking its premiums this spring. There are those looking for the increase in MIP to reduce its market share and preliminary results is showing it is having the desired effect.

On April 9, FHA officially raised its annual premium by 10 basis points and its upfront fee by 75 bps. That means borrowers are paying 175 bps for the upfront fee and 125 bps for the annual premium on FHA-insured loans with a loan-to-value ratio greater than 95%.

Lenders originated $18.5 billion in forward FHA loans in June, down 8.4% from May. During the first nine months of fiscal year 2012 (ending June 30), FHA endorsed $152.5 billion in single-family mortgages, down 11.5% during the same period in FY 2011.

FHA should get a boost in originations, at least temporarily, from its special streamline refinancing program that President Obama announced in early February.

The special program lowers premiums to entice existing FHA borrowers who have been reluctant to refinance over the past three years. Many are underwater with low credit scores. But they continue to make their mortgage payments.

The program was launched on June 11 and 84,600 applications for streamline refinancings were filed by the end of June. In the months preceding the launch, FHA was receiving 33,000 to 47,000 streamline refinance applications per month. In May, applications fell to 17,000 in anticipation of the June 11 start date.

Eligible borrowers who haven’t refinanced their FHA loans since May 2009 only have to pay a 1 basis point upfront premium and a 55 basis point annual premium.

FHA is hoping to reduce delinquencies through the special streamline program. But it is not going to produce much revenue due to the reduced premiums.

As for the loans already in portfolio, FHA has been living a charmed life as its inventory of delinquent single-family loans built up over the past two years and servicers filed very few claims.

In 2011, FHA expected to pay nearly 114,500 claims on defaulted loans but received just 61,200 claims, which cost the agency $7.5 billion.

But that appears to be changing now that its largest servicers are finally moving ahead and filing for foreclosures.

In the second quarter, FHA servicers started 96,700 foreclosures, up from 61,800 in the first quarter, according to a Mortgage Bankers Association report.

“FHA loans represent 16.4% of all loans serviced, but 26% of new foreclosure starts,” the MBA said in its latest delinquency report.

As of June 30, FHA had 721,100 delinquent loans 90 days or more past due. That translates into a 9.44% serious delinquency rate.

FHA officials have been expecting the inventory logjam to break once the mega-servicers adopted the foreclosure processing requirements contained in the $25 billon settlement with the state attorneys general and federal regulations.

FHA officials “saw a mild ramp-up in foreclosure activity toward the end of the [first] quarter, mostly due to the recent settlement. We expect the pace of foreclosures to increase the next few quarters,” a May 31 FHA report says.

So now the race is on to see if FHA has the capital and reserves to pay all the claims that will be coming due.

FHA has $7 billion in capital and another $25.3 billion in reserves to cover expected claims.

The latest data show FHA has been able use revenue from mortgage insurance premiums to cover 80% of net claim losses.

Over the past four quarters ending March 31, FHA paid out $9.6 billion for default claims, $7.6 billion came from premium revenue and $1.9 billion came out of reserves.

However, the number of claims filed in the second quarter totaled nearly 41,650, up from 34,400 claims filed in the first quarter of this calendar year.

FHA is also turning to nonperforming loan sales and encouraging short sales to reduce losses. The loss rate on REO sales is 72% compared to 48% on short sales.

FHA also has an ace in the hole that could keep the federal mortgage insurance program in the black, if necessary. The Department of Justice and HUD Inspector General are investigating several FHA lenders for allegedly submitting bad FHA loans for endorsement.

Earlier this year, Bank of America agreed to a $1 billion settlement involving FHA loans originated by Countrywide. Smaller settlements involving Deutsche Bank and Flagstar Bancorp also helped to replenish FHA’s coffers.