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FHA Mortgage Audit Report Postponed — What’s Up?

by Peter G. Miller
November 4th, 2009

This morning at 9AM, HUD Secretary Steve Preston and FHA Commissioner David H. Stevens were supposed to host a briefing at the National Press Club in Washington to talk about the FHA’s fiscal health and financial outlook, based on an independent actuarial study.

Instead, this morning, HUD has sent reporters a note saying that “last evening, the independent auditor that prepares the FHA’s actuarial study notified HUD and FHA that the report will not, in fact, be final in time for today’s press briefing. Therefore, we are postponing the briefing and all related communications.

“HUD and FHA leadership will meet with the auditors today to ensure that we can report to Congress in a timely and accurate manner.”

Critics will look at this postponement as evidence that the FHA has something dark and woeful to hide while supporters will be thankful that someone in government is trying to get their facts right, a new concept in the Nation’s capital.

Realistically you don’t have to be Nostradamus to figure out what lurks ahead for the FHA. Here’s what we have been seeing during the past year — and what we can expect.

First, risk has been reduced by getting rid of seller-funded, third-party, downpayment assistance plans. Whether one likes or does not like such programming, HUD says they are a major cause of FHA mortgage foreclosures. Speaking last May, HUD Secretary Donovan said that “seller funded downpayment assistance loans accounted for 14 percent of all FHA loans outstanding, but generated 31 percent of all FHA foreclosures and 31 percent of all losses on foreclosed-properties. Looking forward, we estimate that without the elimination of this program, FHA would have needed an FY 2010 appropriation of over $2.5 billion. Instead, we project that FHA will return to the tax payer over $1.7 billion.” The bottom line: Buyer assistance programs are not coming back.

Second, the amounts available for FHA reverse mortgage borrowers have been scaled back. This will cut losses because the reverse mortgage program — NOT the forward lending program — is where the FHA is really running into difficulties. Look for the FHA to continue efforts to reduce HECM volume.

Third, the FHA is reducing risk by getting better-qualified borrowers. Typical FICO scores have risen during the past year from 660 to 689. This is particularly impressive when you consider that much of economy is in the dumper.

Volume

Nobody is going to fool substantially with the FHA mortgage program regardless of what an auditor says. Why? Because the FHA as it is now operating is simply too important. The Mortgage Bankers Association says that more than 30 percent of all loans are no FHA-insured.

Any effort that results in fewer forward FHA mortgages (reverse mortgages are a different story) is going to significantly — and negatively — impact the real estate marketplace, a marketplace which is recovering in a few areas but is dicey in most. Politically and economically big changes are just not going to happen.

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