The surge in Federal Housing Administration lending after the housing bust may turn out to be the mortgage insurance fund’s salvation. At least that’s the opinion of long-time FHA analyst Brian Chappelle who worked at the government insurer a few decades back.
Today, the agency’s portfolio boasts 7.5 million loans, but only 16% were originated during fiscal years 2005 through 2008 when the agency was mostly insuring subprime borrowers.
Only 22% of the 2005-2008 book of business covers borrowers with credit scores of 680 and higher.
Since fiscal year 2008 ended, FHA has tightened its underwriting guidelines, hiked its premiums and originated 4.4 million loans. Today, 54% of the post-FY 2008 loans have credit scores of 680 and above, according to Chappelle.
“If FHA can just make it through the next two years, the insurance fund has tremendous upside because they are collecting the highest premiums on the best book of business they ever had,” the former FHA official told National Mortgage News.
“They are collecting a boat load of cash,” Chappelle said in an interview.
The Washington-based consultant who heads Potomac Partners recently completed an analysis of FHA’s portfolio. He sent his “FHA Facts” paper to House and Senate staffers on the banking committees.
FHA critics, including former GSE official Ed Pinto, claim the agency’s single-family program is in disarray and headed for a government bailout. In particular, they point to the 707,300 seriously delinquent loans the government insurer has on its books.
While 9.4% of FHA-insured loans are 90 days or more past due and pose a problem, Chappelle counters that this buildup of nonperforming loans is due to processing delays associated with robo-signings and foreclosure abuses. However, FHA has reserved for those claims and servicers are starting to work through the backlog of nonperforming loans. He expects to see a spike in FHA foreclosure starts over the next six months.
Meanwhile, the newer books of FHA loans have the lowest 30- and 60-day delinquency rate in 10 years.
“There are not a lot of new delinquencies coming in,” Chappelle said. “So it is just a big bulge of seriously delinquent loans that have to go through system,” he said. The seriously delinquent loans will either be foreclosed on or modified. In his research paper, the consultant predicts the FHA FY 2009 book of business will break even. The FY 2010 and FY 2011 books will generate at least $16 billion to the economic value of the FHA insurance fund, he believes.
“The data show that recent originations are having a positive effect in the performance of FHA’s portfolio,” he writes. “FHA is in far better financial shape today because of the loans insured since its portfolio spiked in the aftermath of the private mortgage market collapse.”
Chappelle told this publication that Fannie Mae and Freddie Mac discouraged a lot of new business by increasing their loan level price adjustments.
Currently, the GSEs’ 2005-2008 books of business account for 29% of their loan portfolios. At FHA, legacy loans account for only 16% of the insured portfolio.
“The good news for FHA is that they added all this new business so it diminished the impact of the bad loans,” the consultant said.
Chappelle acknowledges that FHA is not “out of the woods” yet. It would be hurt if there are further declines in home prices or the economy goes into another recession. But he remains optimistic.
“The data shows that the FHA loans insured since 2009 have strengthened the fund, reduced the possibility of needing any taxpayer assistance and sustained the housing market at a time when there were limited options in the private market,” he says.
