“Lenders quickly tightened their standards beginning in 2007, sending much more of business to the agency, and the FHA has shouldered large losses to mortgages made between then and 2009, when it tightened its own standards and oversight. In part because of those losses, the FHA required a $1.7 billion infusion from the U.S. Treasury in 2013, which was its first bailout in 79 years.” Wall Street Journal
“Ironically, with the benefit of hindsight, had private mortgage-backed securities markets for non-prime and alt-a loans not existed prior to the financial crisis, FHA would have guaranteed many of those mortgages (just as they did when private mortgage lending tightened starting in 2007) and suffered tens, if not hundreds of billions more in losses. In other words, because there was a substantial, multi-trillion dollar private MBS marketplace pre-crisis, FHA’s losses were much lower than they otherwise would have been. In spite of being a small part of the mortgage market pre-crisis, FHA’s mortgage insurance fund became insolvent and taxpayers’ bailed them out to the tune of $1.7 billion. And to avoid a much larger taxpayer bailout, FHA decided to recapitalize themselves by dramatically raising their insurance fees for new mortgage borrowers and “extorting” (because they could) billions in settlements, related to unproven and highly questionable allegations of representation and warranty violations, from the private mortgage lenders and banks who did business with them. Because FHA has a federal government insurance monopoly (for low-down payment mortgage borrowers with average credit and debt-to-income ratio), they could increase their fees to new American borrowers to whatever level they wished. And they did. FHA increased their upfront insurance fee seven-fold and nearly tripled their annual insurance fee. The National Association of Realtors estimates that in 2013, nearly 400,000 creditworthy borrowers were priced out of the housing market because of these high FHA premiums. Finally, FHA has touted the mortgage financing they provided in 2008-2011; “we were the mortgage lender of last resort”. But did it really make sense to provide nearly 100% mortgage financing to prospective American homebuyers during this period? Weren’t these buyers essentially “catching a falling knife”; doomed to be underwater (their mortgage exceeding their homes value)? Was this mortgage lending, that FHA facilitated and encouraged, during this period really a benefit to these borrowers? It seems like the benefit accrued more to the housing and mortgage/banking industry, and maybe to the economy as a whole? I am not blaming FHA. I am just making the point that FHA, because it is part of the government, wasn’t a great lender or a saint and the pre-crisis mortgage industry, because it was for-profit, wasn’t a bad lender nor a sinner.” Mike Perry, former Chairman and CEO, IndyMac Bank
Federal Housing Administration in the Black for First Time Since 2011
Slow Pace of Improvement Could Complicate Agency’s Efforts to Boost Housing Recovery
By Joe Light
The Federal Housing Administration is projected to be in the black for the first time since 2011. But the FHA’s independent annual audit also found the pace of recovery remains slow, potentially complicating the agency’s efforts to help strengthen the housing recovery.
The audit, released Monday, found that the FHA’s insurance fund had an economic value of $4.8 billion at the end of September, up from negative $1.1 billion last fiscal year. Its capital reserve ratio, which the FHA is supposed to keep above 2%, grew to 0.41%. While an improvement, it was still short of last year’s projection.
More important, the report estimated that the FHA won’t return to the congressionally mandated 2% threshold until 2016, a year later than last year’s estimate. The FHA doesn’t issue mortgages but insures lenders against losses. Borrowers can pay for insurance on mortgages with down payments of as little as 3.5%.
Officials with the Department of Housing and Urban Development, which oversees the FHA, emphasized that the fundamentals of the FHA’s portfolio were sound and that the fund was on an upward trajectory. They attributed a large part of the unexpectedly slow growth to the FHA’s reverse-mortgage program, whose economic value dropped sharply.
“The improvement in the fund is very welcome,” said HUD Secretary Julián Castro. “We’re confident that the fundamentals of the fund are strong.”
But the weaker-than-expected financial results could make it more difficult for FHA officials to lower insurance premiums, which many groups have argued are too high and are hampering the housing recovery. Lower premiums would reduce the cost of buying a home and widen the number of people who could afford to become homeowners.
The FHA is “clearly on a pathway of growth. The question is that, with the trajectory of growth rates, are they excessively charging their borrowers?” said David Stevens, president of the Mortgage Bankers Association and former head of the FHA.
Current Acting FHA Commissioner Biniam Gebre said he thought that the independent report showed clear improvement in the fund but wouldn’t say whether it made it more or less likely for the agency to change premiums. The FHA last year saw lower serious delinquency rates, contributing to its improving health.
Since July 2008, the upfront cost for a borrower to receive a typical FHA loan has risen 0.25 percentage point to 1.75%, while the required annual premium has been raised five times to 1.35%, according to Moody’s Analytics.
The higher costs have helped to shore up the FHA’s finances, but they’ve also driven many of the most-credit-worthy borrowers to private lenders, where they can often still make low down payments and pay less for private mortgage insurance. That has given the FHA a smaller book of business than expected.
“The FHA doesn’t operate in a vacuum and it’s a competitive world out there,” said Brian Chappelle, a partner at consulting firm Potomac Partners who used to work at the FHA. In the year ended September, the FHA insured $134 billion in new loans, not including reverse mortgages, far less than the $191 billion that the FHA projected in the last audit.
That problem could get exacerbated next year, as Fannie Mae and Freddie Mac roll out new programs to allow the companies to guarantee mortgages with down payments of as little as 3%, rather than the current 5% limit for most mortgages. Executives at those companies have already said that they expect those mortgages to carry lower costs than FHA-backed loans for many borrowers.
“If the FHA keeps premiums at these levels, they could be adversely selected. The problem could be quite serious,” said Mark Zandi, chief economist at Moody’s Analytics, whose economic projections are used in the actuarial report.
The agency took little part in the housing boom, as lenders were willing to make loans with much easier terms. Lenders quickly tightened their standards beginning in 2007, sending much more of business to the agency, and the FHA has shouldered large losses to mortgages made between then and 2009, when it tightened its own standards and oversight. In part because of those losses, the FHA required a $1.7 billion infusion from the U.S. Treasury in 2013, which was its first bailout in 79 years.
Although Monday’s report indicated that the FHA won’t need another boost, it also showed that its coffers are further from health than hoped, which will provide support to those who think premiums should stay high.
“If they want to maintain risk levels where they are and protect the taxpayers, then they need to keep their premiums where they are,” said Edward Pinto, co-director of the International Center on Housing Risk at the right-leaning American Enterprise Institute.
Law mandates that the FHA keep reserves of at least 2% of the loans it guarantees, a test that the FHA hasn’t passed since 2009. Last year, the agency projected that the ratio would reach 1.2% by this year and more than the required 2% by 2015. Instead, the report showed that it reached 0.41%.
The report should give the agency enough confidence to continue in their attempts to ease mortgage access, said Jim Parrott, a senior fellow at the Urban Institute and former housing policy adviser in the Obama White House.
For the past several years, some lenders have eschewed lending to riskier borrowers, even if they could be backed by the FHA, for fear that they later be penalized for making mistakes on loans. For the past several months, the FHA has been clarifying its guidelines and punishments in an attempt to allay those fears.
“They will finally be able to return their focus to ensuring that credit-worthy borrowers who aren’t traditionally well served by the market can get a mortgage through the FHA,” said Mr. Parrott.