The Federal Housing Administration released its annual report to Congress on the financial status of its Mutual Mortgage Insurance Fund today. Since last year, the FHA’s capital reserve ratio fell from 0.53 to 0.50 percent, insurance claims were 21 percent lower than predicted, and the economic value of FHA’s single-family insurance program increased from $3.6 to $4.7 billion.

Like last year’s report to Congress, this accounting shows that FHA is sustaining significant losses from loans insured prior to 2009 and its capital reserve ratio remains below the congressionally mandated threshold of two percent of all insurance-in-force. However, the report concludes that under conservative assumptions of future growth of home prices, and without any new policy actions, FHA’s capital ratio is expected to approach two percent in 2014 and exceed the statutory requirement in 2015.

FHA’s capital reserve ratio measures reserves in excess of those needed to cover projected losses over the next 30 years. The independent actuarial reviews of the MMI Fund estimate FHA’s capital reserve ratio to be 0.50 percent of total insurance-in-force this year, falling fractionally from 0.53 percent in 2009. The difference is primarily attributed to the use of much more conservative assumptions regarding future house price growth than were used last year, which also resulted in an $8.5 billion decrease in economic value. However, that decrease was offset by a variety of factors, including an $8.7 billion increase in value due to better credit quality, loan performance, and the premium increase implemented earlier this year.

Due in large part to the performance of recently originated loans, FHA’s total capital resources increased by $1.5 billion since last year, to $33.3 billion, and are at their highest level ever – $5.5 billion greater than predicted last year. If the economy were to suffer a further significant downturn, recovery of the capital ratio could be delayed beyond the projected timeframe. However, even in the actuaries’ worst-case stress test scenario, FHA’s capital resources remain sufficient to cover projected claim losses and FHA would not require a taxpayer subsidy, an improvement over last year’s assessment and due to new loans having higher credit quality than had been anticipated.

Loans insured before 2009 are responsible for 70 percent of the expected single family loan losses. Though they are now prohibited, so-called “seller-financed down payment assistance loans” produced $6.6 billion in claims to-date and may ultimately cost FHA $13.6 billion. Without these seller-financed loans, FHA’s capital ratio would be above the congressionally mandated two percent threshold. Conversely, loans insured since 2009 earned $4.8 billion in economic value to the MMI Fund and are estimated to generate $28.3 billion in economic value by 2016. Expected economic value of FY 2010 and FY 2011 loans alone are estimated to reach $11 billion.

The FHA’s forecast assumes an average peak-to-trough housing price drop of 17% from 2007 based on a “Base Case” economic scenario which Moody’s considers to have a 50 percent probability of being as bad or worse than predicted.
A mild second recession (25 percent probability) which “assumes that financial policy initiatives such as foreclosure mitigation are put in place and access to credit improves moderately, but that the improvement is too gradual to allow for a substantial rebound in the housing market until 2012” would result in an average 25% peak-to-trough drop in housing prices and yield a -1.03% capital ratio for the FHA.
A deeper second recession (10 percent probability) which “assumes that the moderate rebound in housing construction in the first half of 2009 pauses and reverses course due to restricted access to credit and continuing high unemployment [with] no significant recovery…until mid-2012” would result in a forecast 31% peak-to-trough drop in housing prices and yield a -1.80% capital ratio for the FHA.
And a complete collapse which “assumes that foreclosure mitigation policies are unproductive, house prices resume their decline, and the NAR median existing sale price falls cumulatively by 45 percent from its 2005 peak to the third quarter of 2012” would result in an average 35% peak-to-trough drop in housing prices and yield a -2.29% capital ratio for the FHA, but is given a probability of only 4 percent.
Annual Report to Congress Regarding the Financial Status of the FHA [hud.gov]
OMG For The FHA [SocketSite]
Financial Status of the FHA Mutual Mortgage Insurance Fund FY 2010 [hud.gov]

14 thoughts on “FHA: Not Out Of The Woods But Feeling A Little Less Lost”
  1. This report is a farce. I have said for years (since before 2007) that FHA would become the dumping ground for all the dreck created by the private banks… and it was.
    FHA is essentially insolvent, and no mental gymnastics can change that fact. I’m not going to bother parsing most of this dreck, I’ll just ask a simple question: how good (or honest) has the government been at forecasting the severity of this recession and our losses to date? I believe it went and goes something like this: “There is no housing bubble. If there were, it would just deflate like a souffle. There may be mild stress in subprime, but it is contained. Remember 95% of people are paying their mortgages. there has never been a national decease in RE prices. The taxpayer made money on TARP. And now, based on current projections FHA will not need a bailout”
    There has been a temporary improvement in FHA’s losses and loss projections due to the “green shoots” recovery that happened in late 2009 and early 2010. But despite that Loans insured before 2009 are responsible for 70 percent of the expected single family loan losses.
    This report conveniently didn’t put the percentage of losses originated since 2007.
    why is that date important? because 2007 is when the banking cartel and our fearless leaders decided to “modernize FHA”, which really meant they stuffed a bunch of dreck into FHA to get it off the bank balance sheets (allowing the banks to “pay back” TARP and bankers to get record bonuses).
    if we re-word what they just said you’ll see what crap this is: nearly A THIRD of all losses in FHA will happen due to loans originated in 2009 and 2010. Just 2 years. And this program continues. The same CRAPPY underwriting will go into the 2011, 2012, 2013 vintages.
    FHA was simply NOT SET UP to buy expensive homes (yes, I’m talking those $729k San Francisco homes).
    as long as FHA, Fannie, and Freddie are to be the dumping ground of the Zombie banks and their pig-CEOs the losses will mount.
    ===
    oh: and obviously it’ll be interesting to see what happens now that the zombie-pig banking cartel has totally F-ed up established Real Estate Law practices and are committing perjury and Fraud on the courts… let’s see what foreclosure loss percentages are going forward in this brave new world.
    if the government is going to stick it to the taxpayers and continue to give the walking-dead banks and their vampire hog CEO’s, the least they could do is either be upfront with us or come up with better lies.

  2. FHA was simply NOT SET UP to buy expensive homes (yes, I’m talking those $729k San Francisco homes).

    I doubt it. Whether or not FHA was set up for that purpose, a 729K loan over the past few years breaks down to like 3500 monthly. And that’s how much it costs to rent a house in an OK part of SF, ex-SFer. Or a larger, decent flat in a nice(er) part of town. Rent has not been going down lately either.

  3. 🙂
    usually I try to be an even tempered guy. But the misdirection and disinformation that has been blasted at us by our govt, our media, and business leaders has been breathtaking.
    it is especially disheartening to see that the few people who were “sticking up” for the taxpayer/little guy have all either been demoted, replaced, or put in line by the higher ups. (such as the head of the FHA).
    some days it is just too much.
    all that said, nobody (including me) knows the future, so maybe the FHA will not need a taxpayer funded bailout. Maybe instead it will be yet another covert bailout. Or maybe no bailout at all. Anything is possible, no matter how improbable, I guess.

  4. anon.ed:
    my argument wasn’t that FHA should or shouldn’t cover $729k mortgages. I’m only talking about the financing arrangement of the FHA.
    It literally was not set up to adequately insure homes that cost that much.
    Sort of like this:
    I build a 2 lane bridge with a shoulder on each side, rated to hold the weight of 2 lanes of cars.
    over the years, county planners decide that this should be a 4 lane bridge. So they just convert the shoulders to 2 more lanes.
    but the bridge wasn’t built to support 4 lanes of cars.
    you have to EITHER
    -restrict the bridge to 2 lanes
    or
    -put in a lot of money to upgrade the underlying support structure.
    notice: I’m not talking about if the bridge “should” have 2 or 4 lanes at all. I’m talking about the structural integrity of the bridge.
    Likewise: FHA was set up with a capital structure that can support a certain amount of losses in a certain type of environment.
    when the garbage hit the fan, our fearless leaders just increased the loan limits without shoring up the capital base.
    this is why the head of the FHA was totally against this plan from the get go. And fought it tooth and nail. Until he was cowed into submission.
    ===
    as for the “should” argument: I continually hear about how rich SFers are. why do they need a program aimed at LOW income buyers? why do people who want a $700k house need yet another subsidy? (apart from their mortgage interest deduction which is already a huge monetary gain based on the amount of interest on $700k homes).
    in other words, why do middle class people making $50k-100k per year have to pay taxes to backstop a Federal entity that gives out subsidized rates to people in the top 5-10%?

  5. OK. First, I wonder what percentage of FHA money has gone to the “high cost area” regions? Also, you’re bringing up insurance supplanting default on the high cost loans. Hypothetically I suppose that could be a huge problem and I agree. But in practice, locally, if someone defaults, then what? They’re looking at spending similar amounts of money for rent.

  6. “But in practice, locally, if someone defaults, then what? They’re looking at spending similar amounts of money for rent.”
    Wrong. They’re looking at spending substantially less in rent on a comparable place (unless they bought their place before about 2001). Plus they avoid further depreciation. Plus they avoid the hefty transaction fees when they decide to move. but they do take an ugly hit to their credit rating.

  7. anon.ed:
    again: I’m not arguing if buying at $729k is a reasonable alternative to local rent in SF.
    I only argued that FHA wasn’t structurally set up to handle loans of these denominations.
    you are bringing up completely separate ideas, specifically whether or not $729k is reasonable or not. I also happen to believe that the US Gov should NOT be supporting $729k homes, regardless of area. You may of course ask how people of average income could afford a home in SF… and the answer is simple: the same way they did for thousands of years prior to “modernization” of FHA.

  8. And I conceded your point about FHA not being able to handle the eventuality you alluded to. Whether or not it would actually occur is where the relative rent comes in, IMO.

  9. oh now I see your point.
    Relative rent is not necessarily relevant in this case, IMO. My rationale is that the loss of the house is not a voluntary action for most borrowers. It only comes when they have exhausted all other options. (run out of savings, cut cable, ate Ramen, etc)
    thus they may own a place with a monthly holding cost of $4500, but after they are foreclosed upon (they couldn’t afford the $4500/mo, remember) they move into a rental that is $2500. or they move in with grandma.
    but they certainly aren’t going from $4500/mo owning cost to $4500/mo renting costs.
    the new buyers of the foreclosed property obviously understand that the place is not worth what it was back in 2007 or prior, so they bid less. This means the lender takes losses for which FHA must pay.
    FHA’s balance sheet has seen remarkable deterioration as has Fannie and Freddie for precisely the reasons above. Americans simply cannot (and never could) afford home prices in the mid 2000’s. The losses are already there… they are just not accounted for yet.
    Somebody has to eventually take the loss. Thanks to our political leaders that will be Fannie, Freddie, FHA, FDIC and the Fed. all ultimately guaranteed by the taxpayer (in theory).

  10. I definitely agree that the government should not be propping up people who can afford a $729K home. Even at the ridiculously low interest rates of today, using 28% of gross income, that’s a minimum income of almost $125K required for a $729K loan under traditional standards. That’s way in the stratosphere, relatively speaking, in a country where median is closer to $50K.

  11. Well, the good news is that it is becoming harder and harder for marginal borrowers to get an FHA loan. Another 15 million potential borrowers are being locked out each month or two as standards tighten more and more. Because the banks have to take back souring loans, they are tightening farther than the minimum requirements. While that shrinks the market, it limits the losses.
    http://www.bloomberg.com/news/2010-11-17/home-ownership-gets-harder-for-americans-as-lenders-restrict-fha-mortgages.html
    So, although it lowers the number of buyers, which further depresses prices, it helps prevent more losses for the banks, so it lesens the bailouts needed.

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