The Federal Housing Administration (FHA) is expected to report on Friday that losses on delinquent mortgages—which are said to represent nearly 10% of the $1.08 trillion in loans FHA has guaranteed this year through September—have drained its reserves and pushed the agency once again into a negative area that could require a cash injection from the U.S. Treasury for the first time in FHA’s 78-year history.
If that report, based on an annual audit, confirms articles published today by TheWall Street Journal, TheNew York Times, Reuters, and Bloomberg, among other news sources, it would mean that for the fourth consecutive year FHA’s cash reserves in its Mutual Mortgage Insurance Fund had fallen below the 2% capital ratio of total loans that Congress mandates the agency needs in order to repay claims on projected losses.
FHA guarantees about 15% of all U.S. mortgages with outstanding balances, and has been seminal during the housing recession in providing capital access for mortgages, specifically to first-time home buyers. FHA had projected last year that it would show a $9.4 billion positive value in 2012. And this year it has attempted to bolster its finances by increasing premiums and volume of loans. It also received a one-time payment of nearly $1 billion from mortgage services to settle foreclosure execution claims.
However, the Journal reports that as many as 25% of the loans FHA guaranteed in 2007 and 2008 are “seriously delinquent,” compared to about 10% of its loans insured in 2010.
In his October 2012 “FHA Watch” newsletter, Edward Pinto, an American Enterprise Institute resident and former Fannie Mae executive, asserts that 17.3% of FHA’s loans in September were delinquent (meaning at least 30 days in arrears), and that delinquencies had increased by 77,000 over August. FHA’s net worth, Pinto estimates, had fallen to a negative $28.3 billion, and its capital shortfall (based on the 2% capital ratio formula) was $48 billion.
Pinto cites FHA’s own 2011 Actuarial Study, which projected “that 9.6 percent, or 280,000, of the 2.95 million new loans insured during 2009 and 2010 will ultimately be foreclosed upon or otherwise result in a claim against the FHA’s insurance fund.”
Pinto told the Times that the “fundamental problem” with FHA has been that “its loans are too risky.” Borrowers with relatively low FICO scores (at around 660) have been able to secure a loan insured by FHA with down payments as low as 3.5%.
The big question now is whether the Treasury will need to come to FHA’s rescue at a time when questions about the nation’s ongoing investment in housing continue to be raised. At the very least, HUD, which oversees FHA, finally might need to take a stronger stand on enforcing regulations that tighten the agency’s insurance standards and, as a consequence, limit mortgage availability. Other news sources have reported that FHA is contemplating other internal reforms that would shore up its portfolio and balance sheet.
Inside Mortgage Financelast week quoted the Mortgage Bankers Association’s CEO David Stevens, who predicted that the second Obama Administration would continue support “for lowering maximum loan-to-value ratios and upward premium pricing to strengthen the FHA’s Mutual Mortgage Insurance Fund.” However, while President Obama wants to reduce the FHA’s presence in the mortgage market for a larger private sector role in mortgage finance, “he is inclined to proceed cautiously so as not to disrupt consumer access to affordable FHA financing,” Stevens is quoted as stating.
John Caulfield is senior editor forBuilder magazine.