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FHA reserves $5 billion ahead

by Peter G. Miller
December 1st, 2010

In what will surely come as a shock to the FHA’s assorted critics, the program’s reserves have increased by $5 billion in the past two years.

As has been the case since 1934, the FHA reserves are self-supporting — they draw no money from taxpayers.

When you borrow money from the FHA you must pay a premium for the insurance provided under the program. In exchange for the insurance it becomes possible to buy real estate with 3.5% down instead of the 20 percent down that lenders would really like. The money collected from FHA borrowers is held in what is generally called the Mutual Mortgage Insurance (MMI) Fund.

In its 2010 Annual Report to Congress, HUD reports that “the total capital resources of the MMI Fund, which is the combined sum of the Capital Reserve and Financing Account, have actually grown by over $5 billion in the past two years.”

All, however, is not rosy.

In general terms, FHA loans issued between fiscal 2000 and 2008 are expected to produce a loss. The loans for fiscal 2009 is expected to break even while in fiscal 2010 and 2011 profits from the program will be so large that they will contribute toward the reduction of the pre-2009 losses.

It was prior to 2009, of course, that the FHA allowed downpayment assistance plans (DPAs) through non-profit third-party organizations. In essence, a seller would make a contribution to a non-profit and the non-profit would provide a grant that a purchaser would use to buy the property. HUD has said that such assistance programs were a major source of FHA losses.

What Happened in 2010?

HUD is telling Congress that fiscal 2010 was a very good year for the program.

“In total,” says HUD, “the FHA insured $319 billion of single-family mortgages in FY 2010, representing 1.75 million households. These aggregate volumes are second only to the volume of FHA activity in FY 2009.”

FHA loans remain hugely popular and the reason concerns security and money. Under FHA guidelines there are no prepayment payments, no balloon payments and no wildly-rising monthly costs.

No less important, FHA loans result in lower costs of homeownership when refinancing:

“FHA-insured borrowers who refinanced with the FHA in FY 2010 saved an average of $127 per month. In the last six months of the year the savings were over $140.2 The rate at which borrowers return to the FHA after a loan payoff is referred to as a ?recapture? rate. The recapture rate of 60 percent during FY 2010 nearly matched the historic level seen in FY 2009.3 These loans continue to contribute insurance premiums to the MMI Fund and the lower monthly payments generally make them of lower risk than the loans they replace.

Self-Interest & The Practical Result

If you’re a potential FHA borrower you want the program to do very well. The reason, of course, is self-interest. The better the FHA does the more likely it will be able to hold down mortgage insurance premiums.

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