Business is booming for the Federal Housing Administration’s mortgage guarantee program, and the solid performance of loans insured since 2009 means that FHA won’t require a taxpayer bailout even under the most dire circumstances, according to independent actuarial studies released today.
Anticipated claims from loans insured at the height of the housing bubble continue to weigh on FHA’s capital reserve ratio, however, and it will probably be 2014 or 2015 before it’s built back up to a congressionally mandated 2 percent, the Department of Housing and Urban Development said in its annual report to lawmakers.
The capital reserve ratio measures reserves in excess of what’s needed to cover projected losses over the next 30 years. The independent actuarial reviews of FHA’s mutual mortgage insurance (MMI) fund estimated that FHA’s capital reserve ratio has dropped to 0.5 percent of total insurance-in-force.
That’s down from 0.53 percent a year ago, but the difference was mostly due to the use of more pessimistic — and realistic — assumptions regarding future house-price declines, FHA Commissioner David Stevens told reporters in a conference call briefing on the studies.
The "base case" economic scenario assumes a peak-to-trough drop in the Federal Housing Finance Agency’s home-price index of 17 percent. Economists with Moody’s Analytics consider it more likely that the peak-to-trough decline will be 15 percent, in which case FHA’s capital ratio is currently 0.83 percent.
In a worst-case scenario where the nation enters a depression and the FHFA index falls 35 percent, the capital ratio is -2.29 percent. Even then, premiums from new loan insurance would still cover claims without taxpayer assistance, the studies found.
Premium increases and the solid performance of recently originated loans means that FHA’s total capital resources have increased by $1.5 billion since last year to their highest level ever, $33.3 billion.
That’s $5.5 billion more than predicted by last year’s actuarial study, which overestimated claims expenses by 21 percent. Premiums from loans insured since 2009 added $4.8 billion in economic value to the MMI fund, and loans insured in 2010 and 2011 are expected to net $11 billion.
In the nine-month period ending in June 2010, FHA insured 38 percent of all home-purchase loans and 9 percent of refinancings. Loans insured this year have the best credit characteristics in FHA’s history, with 57.2 percent of borrowers having FICO scores above 680, and only 1.3 percent under 600.
That’s potential ammunition for critics, who say that in order to shore up its finances, FHA has shifted its focus from helping low- and moderate-income borrowers who have difficulty saving up downpayments, to providing mortgage insurance for more affluent buyers.
"There’s absolutely no question that FHA’s role is larger than we’d expect it to be, and larger than we think it should be over the long term," Stevens said when asked about such criticism.
But FHA’s expanded role has helped it play a countercyclical role in providing capital to mortgage markets, he said, keeping the recovery on track. At the same time, he said, FHA continues to serve first-time and minority buyers.
FHA insured more than 1.1 million purchase mortgages in the fiscal year ending Sept. 30, 2010, including 882,000 loans taken out by first-time homebuyers. FHA also insured 555,000 refinancings, for a total of 1.66 million "forward" mortgages (FHA also insured 78,757 reverse mortgages).
That’s more than quadruple the number of forward loans FHA insured in either 2006 or 2007, when subprime lenders — often employing "piggyback" second loans to avoid mortgage insurance — took market share away from more traditional programs.
Data collected from lenders under the Home Mortgage Disclosure Act (HMDA) suggests that FHA insured mortgages for 60 percent of all African American and Latino homebuyers in the U.S. in 2009.
Together, FHA, USDA and VA government loan guarantee programs insured nearly 80 percent of purchase mortgages taken out by African Americans last year. That compares with 71 percent of loans taken out by Latinos and 47 percent of whites.
The National Association of Realtors, which maintains that Fannie Mae, Freddie Mac and FHA have all gone too far in tightening underwriting standards, would like to see FHA helping on both ends of the market.
NAR has lobbied against proposals to raise FHA’s minimum downpayment requirement from 3.5 percent to 5 percent, while also advocating that temporary loan limits allowing FHA to insure mortgages up to $729,750 in high-cost markets be made permanent.
On Oct. 4, FHA began requiring that borrowers have at least a 580 FICO score in order to purchase a home with the minimum 3.5 percent downpayment. Many lenders have stricter policies, as evidenced by the small percentage of recent FHA guarantees on loans to borrowers with FICO scores below 600.
FHA now requires that borrowers with scores between 500-579 make downpayments of at least 10 percent, and those with scores below 500 don’t qualify for the program at all.
Those policy changes, announced in July, generated a spike in loan applications at the end of September. Other steps FHA has taken to stem losses include a ban on seller-financed downpayment assistance, tightening of underwriting guidelines for streamline and cash-out refinance loans, changes to appraisal standards, and increased oversight of lenders.
FHA has seen $6.1 billion in losses on the more than 1 million loans it insured from 1998 to 2009 that relied on seller-funded downpayment assistance, and expects another $7.5 billion in losses.
If FHA had never insured those seller-financed loans, its capital ratio would be above the congressionally mandated 2 percent threshold.
NAR is supporting a bill, HR 6256, that would allow FHA to conduct a pilot program for "shared equity" mortgages. The program would allow FHA borrowers to partner with third-party investors, who would provide a no-interest loan to buy down the principal on the mortgage. Investors would get a share of any future equity in the property.
NAR is recommending that the investors’ equity in a home be capped, so that homeowners would be able to refinance into a traditional mortgage once a threshold has been reached.
HR 6256, the Strengthening FHA Through Shared Equity Homeownership Act of 2010, was introduced by Rep. Gary Miller, D-Calif., on Sept. 29, and was referred to the House Committee on Financial Services.