Congress Increases FHA Authority by $130B

It will be a banner year for FHA. Congressional appropriators are expecting another big year for the FHA single-family program, which could generate $300 billion in new loans by the time the 2009 fiscal year ends in September.

As part of a huge omnibus appropriations bill, Congress has increased the FHA commitment authority to $315 billion for this fiscal year, up from $185 billion in fiscal year 2008. Ginnie Mae, which securitizes FHA and other government-backed mortgages, also received a $100 billion increase in its commitment level to $300 billion.

FHA endorsements totaled $171.8 billion in FY 2008, including $66.4 billion in the fourth quarter that ended Sept. 30. In the first quarter of FY 2009, FHA single-family endorsements totaled $71.9 billion. So FHA is clearly on track to hit $300 billion, particularly as lenders are using FHA to modify and refinance nonprime loans. The Senate recently approved final passage of the FY 2009 omnibus appropriations, which was unfinished business left over from the last year’s Congress. And President Obama signed the massive spending bill. The president is expected to unveil details of his FY 2010 budget in April. The FY 2009 appropriations bill includes a 7% increase in the Department of Housing and Urban Development’s budget to $41.8 billion.

The appropriators also allotted $120 million to the HUD inspector general, including $13 million to keep a closer watch on the FHA single-family program. The appropriators also instructed the Government Accountability Office to determine whether the inspector general’s office has enough resources to audit FHA’s “expanded role” in refinancing subprime, alt-A and other home mortgages.

FHA mortgage insurance covered $534 billion in single-family loans at the end of calendar year 2008 and 6.82% of those loans are 90 days or more past due, up from 5.98% at year-end 2007. The Washington Post said that FHA is facing an increase in defaults where borrowers made no payments or just one monthly payment. The analysis by the Post relied on FHA Neighborhood Watch data, designed to detect lenders with abnormally high early default rates.

Looking at insurance-in-force data, HUD officials maintain the default rate on loans where the borrower missed the first payment is a little lower in 2008 than in 2007. And the default rate on loans where a borrower missed three of the first six payment months has not increased. FDIC delinquency data for the fourth quarter did show a jump in seriously delinquent Ginnie Mae loans 90 days or more past due. Banks and thrifts reported $14.2 billion in “rebooked” Ginnie Mae loans as of Dec. 31, up from $10.9 billion in the third quarter. (FHA loans generally make up the bulk of Ginnie Mae mortgage-backed securities.)

A FHA consultant noticed that the performance of newly originated FHA loans has deteriorated since June and refinancings of conventional loans appears to be the main reason. Reviewing Neighborhood Watch data, FHA consultant Brian Chappelle discovered the early default and claim rate on refinancings hit 4.75% in January, which is 20 basis points higher that the overall rate for all FHA loans originated over the previous 24 months.

The former FHA staffer and founder of Potomac Partners says it is very unusual for refinancings to perform worse than FHA’s total recent originations. “It is the first time we can remember in the 10-year history of Neighborhood Watch that this has occurred,” Mr. Chappelle said. Over 75% of FHA refinancings from October through January involved conventional loans.