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Has The Recession Ended For The FHA?

by Peter G. Miller
September 22nd, 2010

The announcement by the National Bureau of Economic Research that the recession ended in June 2009 was a stunner.

According to the group, it determined that a “trough in business activity occurred in the U.S. economy in June 2009. The trough marks the end of the recession that began in December 2007 and the beginning of an expansion. The recession lasted 18 months, which makes it the longest of any recession since World War II. Previously the longest postwar recessions were those of 1973-75 and 1981-82, both of which lasted 16 months.”

I read this and thought what you’re now thinking: Are you kidding me?

It sure doesn’t seem like the recession is over. I live outside Washington, DC in the state with the nation’s highest income per household and I can assure you that in Maryland we are still having huge economic problems. RealtyTrac reports that our state had 4,859 foreclosure notices in August, hardly evidence of flush times. And if Maryland is having problems, what about other states?

To their credit, the Research Bureau folks tell us that the official end of the recession does not mean all is well.

“In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month. A recession is a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. The trough marks the end of the declining phase and the start of the rising phase of the business cycle. Economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion.”

Recession & The FHA

You can bet that FHA officials are looking at the recession report and wondering what this bodes for them. The FHA is an insurance program which means that it tries to look ahead and to set premium rates on the basis of what it sees as future economic conditions. This is complex work, especially when no one has any idea if the model developed today will have any relationship to what actually happens tomorrow.

FHA loans now have a new set of premiums, 1 percent of the loan amount up front plus .90 percent of the outstanding principal amount on an annualized basis, paid monthly. If the economy is improving — or at least if the economy is not getting worse — then such premiums make sense.

However, if the economy dips when it was supposed to have soared, then the FHA will inevitably need to reconsider the structure of its upfront and annual mortgage insurance premiums. Higher premium costs and fewer FHA loans will be in the future.

In a weird way, no matter how strange it may seem, we should hope the economic models are right and that worst of the recession is truly over.

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