FHA-approved servicers are completing just 10,000 foreclosures a month due to bottlenecks caused by the robo-signing scandal. But settlements with state attorneys general and compliance with regulatory consent orders are expected to free up that pipeline and FHA now expects to pay a slew of claims on defaulted loans next year.
FHA, for fiscal year 2012 (which started Oct. 1), is projecting it will pay $35.7 billion in lender claims, more than double the $14.9 billion it ponied up the year before.
The government's mortgage insurer has a pipeline of nearly 136,500 single-family loans in the foreclosure process with 34,000 units sitting there for more than 12 months.
“Current expectations are that claims could come in very large numbers” in FY 2012, according to a new Department of Housing and Urban Development report on the condition of the FHA Mutual Mortgage Insurance Fund.
This payout will reduce FHA capital resources to $13 billion, down from $33.7 billion at the end of FY 2011. Those capital resources include a slim capital ratio of 0.24%, or $2.5 billion, according to a separate report conducted by independent actuaries. (Its book of business exceeds $1 trillion.)
The remaining $31.2 billion in capital reserves was created to pay expected claims on legacy loans, including mortgages trapped in the foreclosure pipeline. Despite the large anticipated payouts, independent actuaries are projecting the FHA fund will reach its statutory minimum 2% capital ratio in FY 2014.
That belief is based on projections of higher revenue going forward due to the superior performance of FHA loans originated since 2008 and recent changes in FHA's mortgage insurance premiums.
FHA slashed its 2.25% upfront premium to 1% and doubled its annual premium to 115 basis points to capture more revenue during the life of the loan. “Over time, premium collections under the new rates established in FY 2011will be larger than they would have been otherwise,” HUD says. “This is reflected in the projections made by the independent actuaries.”
But this premium structure is now binding on FHA due to its thinly capitalized $1.1 trillion mortgage portfolio—and the agency is reluctant to make changes even if it would increase refinancings of underwater FHA borrowers.
FHA lenders have been complaining that the premiums coupled with a net benefits test is making it difficult to refinance borrowers even at today's low mortgage rates. “That's something we are looking into,” FHA acting commissioner Carol Galante told reporters during a briefing on the actuarial report. “Our actuarial report and our budget projections are based on the premiums we currently have in place. Changing that calculus would also change our trajectory in terms of revenue. And we need to be mindful of that.”
Meanwhile, many are skeptical that FHA can grow its way back to a 2% capital ratio. Some are concerned that FHA is underestimating its losses and may need a government bailout in a few years.
A University of Pennsylvania professor of real estate finance recently released a paper entitled “Is FHA the Next Housing Bailout?” Wharton School professor Joseph Gyourko points out that negative equity and job loss are the “two most important triggers” for defaults.
“It is estimated that more than half “ of FHA-insured loans are underwater, he says, and unemployment rates are projected to remain “stubbornly high.”
Gyourko contends that losses due to future defaults are being systematically “underestimated” and FHA may need a $50 billion capital infusion “even if housing markets do not deteriorate unexpectedly.”
The FHA commissioner told reporters that she is “mindful and aware” of the downside risks facing the federal mortgage insurance fund. “It would take very significant declines in home prices in 2012 to create a situation in which the current portfolio would require any kind of additional support,” she said.
The actuaries have already factored in a 5.6% decline in housing for 2011 with prices bottoming out and rising 1.2% in 2012 in determining FHA's capital ratio.
If FHA needed a capital infusion, it can seek financial assistance from the Treasury Department. FHA would not be dependent on Congress for a bailout.
Galante also pointed out that FHA has paid out $37 billion in claims over the past three years and increased its loan loss reserves by $20 billion.
In addition, HUD expects revenue from the FY 2010 and 2011 FHA loans will pay for “their own future claims and contribute substantially toward paying losses on earlier books of business.”
