Is The FHA Under-Funded?

by Peter G. Miller
January 12th, 2009

Here is something which sounds like a good idea — the House Financial Services Committee held a hearing to discuss “FHA Oversight of Loan Originators,” in other words, is the FHA making sure that lenders follow the rules.

What actually came out in testimony was different, in essence a look at the FHA itself and where it stands from James A. Heist. the assistance inspector general for audit at HUD.

Heist’s testimony raises fundamental questions regarding the FHA, such as whether it has the insurance reserves to continue its expansion. This is important because FHA financing remains one of the few mortgage options reasonably available to borrowers — any reduction in the program would weaken an already-troubled housing market and thus the rest of the economy.

Here are the key points made by Heist:

___ “In response to increasing delinquencies and foreclosures brought about by the collapsing subprime mortgage market, in September 2007, HUD acted administratively to provide mortgage assistance through the FHA Secure program to refinance existing subprime mortgages. The program was expanded in May 2008 to provide lenders the added flexibility to refinance and insure more mortgages, including those for borrowers who were late on a few payments and/or received a voluntary mortgage principal write-down from their lenders. The FHA recently issued a formal letter terminating the program stating that “maintaining the program past the original termination date would have a negative financial impact on the MMI Fund.”

The reality is that HUD saved about 4,100 delinquent homeowners nationwide from foreclosure, despite news releases to the contrary.

___ “The Housing and Economic Recovery Act passed last summer, created a new Hope for Homeowners program to enable FHA to refinance the mortgages of at-risk borrowers. While activity to date has been limited, the FHA was authorized to guarantee $300 billion in new loans to help prevent an estimated 400,000 homeowners from foreclosure. It also authorized changes to the FHA’s Home Equity Conversion Mortgage (reverse) program that will enable more seniors to tap into their home’s equity.”

HUD may be authorized to a lot of things, but to date it has yet to endorse a single loan under the Hope for Homeowners program. Not one. Flashing big numbers doesn’t change the reality of a program that has gone nowhere.

___ “The volume of Single-Family FHA-insured loans has enlarged in Fiscal Year 2008 by tripling from $59 billion in Fiscal Year 2007 to over $180 billion in Fiscal Year 2008. The latest figures from Single-Family market comparisons from October 2008, show that FHA’s total endorsements have increased from 21% of the market the year before to 76% of the market which includes both home sales and refinances. FHA’s home sales’ market share has increased from 6.4% to 23%.”

Mr. Heist’s numbers confirm the growing importance of the FHA program. The housing mess would be, well, messier still without the FHA program.

___ “Many potential homeowner loans may not have come to the agency yet as some of the new initiatives are still taking hold and the industry is flushing out its options and possibly posturing for more favorable terms. FHA may not be able to handle its expanded workload or new programs that require the agency to take on riskier loans then it historically has had in its portfolio.”

There are any number of lenders who have been pushing FHA mortgages for years, a huge favor to borrowers because it has kept them away from so-called “affordability” loan products, the loans at the heart of the foreclosure problem.

___ “HUD has sustained significant losses in its Single-Family program making a once fairly robust program’s reserves smaller. The study shows that FHA’s fund to cover losses on the mortgages it insures are contracting. As of September 30, the fund’s economic value was an estimated $12.9 billion, an almost 40 percent drop from over $21 billion a year ago. The current $12.9 billion economic value represents 3 percent of the mortgages insured by the FHA. Although above the 2 percent ratio required by law, it is well below the 6.4 percent ratio from the same time last year. Moreover, these latest projections used macroeconomic forecast data as of June 2008 and are profoundly sensitive to the accuracy of those forecasts. If more pessimistic assumptions are factored in, the ratio could dip below 2 percent in succeeding years requiring an increase in premiums or Congressional appropriation intervention to make up the shortfall.”

If insurance funding is an issue, then why has HUD sent more than $13.5 billion in borrower premiums to the Treasury Department during the past few years? The reason reserves are low is simply because the money was not kept in the FHA insurance pool — nor is it refunded to borrowers any longer. What used to be a mutual insurance plan is now, simply, a profit center for the Treasury Department.

For all of Mr. Heist’s testimony, please press here.

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