Loan originations backed by the Federal Housing Administration fell nearly 30% in fiscal 2011, and several players in the mortgage industry now believe the agency went too far in raising premiums and tightening lending standards.
Overall, FHA endorsed 1,175,900 forward mortgages in FY 2011, down 29% from FY 2010 when the government approved $298 billion of forward mortgages.
As of Aug. 30, FHA had endorsed $203 billion of single-family loans (not counting reverse mortgages) with one month left in FY 2011.
FHA is an important source of financing for first-time homebuyers. Roughly 60% of FHA loans are “purchase money” loans and 75% of those financed first-time buyers during the first 11 months of FY 2011.
Low sales activity is partially to blame for the slowdown in FHA loan production, for sure, but HUD may have been tripped up by two premium increases that occurred over the past 12 months.
The Department of Housing and Urban Development raised the FHA annual premium by 25 basis points in October 2010 and by another 25 bps this past April. The annual premium on FHA-insured loans is now 115 bps.
Lenders also are complaining that FHA refinancings are being hampered by a 5% “net benefit” test. The test requires that for approval, the borrower’s monthly payment must be reduced by at least 5%. If the 5% test were eliminated, lenders claim refinancings would sky rocket and more borrowers could take advantage of historically low mortgage rates.
In fairness to FHA, the agency buckled down on underwriting due to losses on its legacy 2006-2008 books of business that eroded its capital reserves. Congress requires FHA to maintain a minimum 2% capital ratio which slipped to 0.5% in FY 2010.
In mid-November, independent auditors will update their assessment of FHA’s capital position. Some are hoping the FY 2011 actuarial report will give the government insurer some breathing room to loosen up on standards.
“Hopefully, the actuarial report will give HUD some flexibility to help revitalize the housing market,” said FHA consultant Brian Chappelle.
Meanwhile, a new HUD internal report shows that FHA loans originated in the past three years are performing very well. The FHA single-family program (excluding reverse mortgages) has turned into a cash cow as a result of the higher insurance premiums. For instance, a $200,000 FHA loan is generating nearly $8,000 in annual premiums for the insurance fund, which should bolster FHA capital’s position. (However, the independent auditors have to factor in estimates of future house prices and default rates based on economic models.)
“Everything from a factual basis looks very encouraging. The wild card is what estimates the actuaries use for house prices over the next several years,” Chappelle said. The consultant is a founder and partner of Potomac Partners in Washington.
Meanwhile, HUD estimates the recent reduction in loan limits on government-backed loans will trim FHA endorsements by 3% in FY 2012. On Oct. 1, the maximum loan limit for FHA mortgages fell to $625,500 from $729,750 in high-costs areas.
In other areas, the loan limit was reduced to 115% of the local area median home price, from 125%. “As a result, FHA loan limits would likely decline in 669 counties of the 3,334 counties that are eligible for FHA insurance,” according to a HUD market analysis brief.
Sens. Robert Menendez, D-N.J., and Johnny Isakson, R-Ga., are trying to attach an amendment to a HUD appropriations bill that rescinds the loan limit reduction for two years and restores the $729,750 maximum loan limits for Fannie Mae, Freddie Mac and FHA loans.
The expiration of the higher loan limits “made a weak housing market even weaker,” Menendez said.
