I would first like to review FHA’s key tenets and current performance.
FHA, at its core, is an insurance program. And like any successful insurance program, it needs to spread its risk.
Just like an auto insurer could not be limited to drivers under the age of 25, FHA cannot be targeted only to higher risk borrowers.
FHA has an even more daunting task than your typical insurer.
Its mission is to serve borrowers not adequately served by the private sector and to operate at no expense to the American taxpayer.
If those goals weren’t enough, FHA is asked to accomplish them without encroaching on the private sector.
Finally, it was asked to increase its role in 2007 when others were running away from the mortgage market.
So how is FHA doing?
First and foremost, we are four years removed from the collapse of the housing market and FHA hasn’t needed any taxpayer assistance.
In fact, according to (Department of Housing and Urban Development) Secretary (Shaun) Donovan’s recent testimony, its cash reserves were at an “historical high” in 2009 and “grew again” in 2010.
At that hearing, Secretary Donovan also said, “We expect FHA to make substantially more money for the taxpayer this year than our actuary predicted.”
This means that FHA’s net worth should more than double in fiscal year 2011 to over $11 billion.
In the MBA’s latest Delinquency Survey, FHA was the only market segment that saw its total delinquency rate fall in the first quarter of 2011. It is now at the lowest level in five years.
Its credit quality is the best in decades as about 60% of its borrowers have credit scores higher than 680 and only 3% have credit scores below 620.
Not surprising, the loans that FHA insured in the last two-and-a-half years have very low rates of delinquency.
A couple of statistics underscore this point:
Early default rates declined 85% from 2007 to 2010, and of the 1.4 million loans made in the last year only 5,036 are in default.
Clearly, fraud and poor underwriting are being rooted out of the FHA program.
In the wake of the housing crisis, FHA has helped millions of families from all walks of life. Still, FHA has maintained its core role of helping the underserved.
According to the 2009 HMDA data, the government insured 65% of the loans made to low- and moderate-income homebuyers and 75% of the loans made to minority homebuyers.
How is FHA doing it?
The Congress eliminated seller funded downpayments in 2008.
Without these loans, FHA would be over the 2% ratio today.
Secretary Donovan and his team moved quickly on a variety of fronts to ensure FHA’s long-term solvency including strong enforcement actions that have reverberated throughout the industry.
While it may not be popular to give lenders any credit in this process, it is a fact that, starting in 2008, lenders implemented their own underwriting restrictions on top of FHA requirements.
With these credit overlays, lenders in effect are saying that they are unwilling to originate certain loans that meet government criteria because of the contingent liability.
Why would lenders do this when there is 100% government backing on these loans?
Mortgage lenders have “skin in the game” in the FHA program.
They have financial risk, enforcement risk, and probably most importantly, reputation risk. Lenders are using credit overlays to manage these risks.
Finally I have comments on two proposals.
I would support raising downpayments if it were necessary to protect the fund. However, the performance data does not support it and it would hurt the very people who need FHA the most.
Regarding the reduction in the mortgage limits, I oppose this provision since it could jeopardize FHA’s financial strength. It has been a cornerstone of the FHA program that higher balance loans perform better lower balance ones.
This point has been in every recent audit including the fiscal year 2010 audit.
In conclusion, any additional targeting in the FHA program will increase premiums to FHA borrowers and increase risk to the taxpayer.
Brian Chappelle is a partner at Potomac Partners LLC in Washington.
