The Federal Housing Administration’s single-family program is facing headwinds as the HUD secretary tries to keep the insurance fund above water and appease critics who want to reign in government programs.
Under his tenure, Housing and Urban Development secretary Shaun Donovan has worked to stem FHA loan losses and increase premiums to stabilize the mortgage insurance fund.
“We have taken more steps since January 2009 to eliminate unnecessary credit risk and assure strong premium revenue flows than any other administration in FHA history,” the HUD secretary told the Senate Banking Committee recently.
In early April, FHA raised its premiums again. The annual premium on a 30-year mortgage with a LTV 95% or higher was hiked 10 basis points to 125 bps. The upfront premium was bumped up 75 bps to 175 bps.
The result: FHA lending is declining. And the April hike is expected to take yet another bite out of FHA production. March figures show that FHA production slowed to $94.7 billion during the first six months of fiscal year 2012 (which ended March 31), down 24% from the same period of FY 2011.
Making these moves has changed FHA’s “trajectory,” Donovan told the Senate panel. “FHA continues to move in a more positive direction.”
But FHA needs to do more, according to Sen. Richard Shelby, R-Ala., who is considering several reforms to shore up the solvency of the FHA fund. “FHA insurance premiums are insufficient to cover losses and build up needed capital reserves,” Shelby told the HUD secretary. “It is clear FHA needs to be reformed to prevent another taxpayer bailout.”
As the ranking Republican, Shelby could become chairman of the Banking Committee next year if the GOP gains control of the Senate.
Meanwhile, the full impact of the April increase in FHA premiums won’t be known for several more weeks when the agency releases its “FHA Single-Family Outlook” report for the month. The March outlook report shows FHA refinancings totaled $37.7 billion in the first half of FY 2012, down 37% from the same period in FY 2011.
But while FHA’s fortunes decline, VA production is going in the other direction, spiking 68%. VA lenders completed $35.1 billion of refinancings—nearly matching the dollar amount of FHA refis. (VA has not tightened or raised its guarantee fees like FHA.)
Donovan noted FHA single-family lending has fallen 34% from a peak of $331 billion in FY 2009 to $217 billion in FY 2011, which ended Sept. 30. “FHA’s market share is decreasing for the first time since 2006, reflecting private capital’s return to the market,” he said.
FHA’s single-family portfolio has ballooned to $1 trillion but the agency has marginalized the worst-performing buckets of loans originated from FY 2005 through FY 2008. (Losses on those loans have nearly depleted FHA’s capital. Many analysts believe it’s only a matter of time before FHA will need a bailout.)
But the loans originated after FY 2008 have performed much better. Assuming home prices stabilize FHA has enough quality loans in its portfolio to rebuild its capital due to the premiums coming in, according to Brian Chappelle of Potomac Partners. “The good news for FHA is the bad loans are currently only 15% its portfolio.” But a continued slowdown in FHA lending will “hurt the housing recovery and the people who rely on FHA the most—first-time homeowners and minorities.”
To mitigate further losses on its worst-performing books of business, FHA will launch a special refinancing program in June that targets older FHA loans originated before June 2009. Starting June 11, the agency will slash its premiums for streamline refinancings—reducing the annual fee to 55 bps and the upfront fee to 1 bp.
“This will allow these borrowers to benefit from today’s lower interest rates and lower their monthly payments,” Donovan said. It also “reduces risk to FHA,” he told the committee.
It is estimated that 3 million FHA borrowers who are current on their mortgage could qualify for this special streamline refinancing program. But these borrowers have been immune from refinancings offers in the past. Many are suspected to have financial issues and are underwater. To encourage lenders to pursue these borrowers, HUD is changing the way it classifies defaults of these streamline refinancings so lenders aren’t penalized in terms of their FHA performance ranking or “compare ratio” with other lenders.
