Loan Modification

FHA To Generate $6 Billion Profit In 2011

By Peter G. Miller

For all the talk of failures, the FHA mortgage program is expected to generate $6 billion in profits during the 2011 fiscal year, a period which begins October 1st.

Looking at the budget for the coming year, HUD says it “will reflect $6 billion in profit for the FHA, generated thanks to the FHA reforms announced last month by FHA Commissioner Stevens. Those policy changes will strengthen the FHA?s capital reserves, while enabling the agency to continue to fulfill its mission to provide access to homeownership for underserved communities and support the nation?s housing market recovery.”

Alternatively, the Washington Post reports that “the share of borrowers who are falling seriously behind on loans backed by the Federal Housing Administration jumped by more than a third in the past year, foreshadowing a crush of foreclosures that could further buffet an agency vital to the housing market’s recovery.”

And, adds the paper, “if the trend continues and the FHA’s cash reserves are exhausted, the federal government would automatically use taxpayer money to cover the losses — a first for the agency, which has always used the fees it charges borrowers to pay for its losses.” (See: Rising FHA default rate foreshadows a crush of foreclosures, February 2, 2010)

Conflict

It seems fairly obvious that the FHA loan program cannot both generate a $6 billion profit and have a “trend” which requires the use of taxpayer money to cover program losses. So who is right?

Since we’re looking into the future there’s know way to know in advance. But what we do know is this: when private-sector loan activity falls FHA activity increases. This means in a slowing market there will be more FHA mortgages. As HUD explains:

The “FHA continues to play a countercyclical role-?serving as a vital backstop to the private mortgage market during the current economic downturn, in which severe capital constraints have greatly reduced the ability of private firms to take on credit risk. The share of FHA-insured single family mortgage originations, at a low point of just 1.9 percent in the fourth quarter of 2006, rose continuously over the next 3 years, reaching 18.7 percent in fiscal year 2009. In terms of dollar volume, FHA insured $181.2 billion of single family mortgages in fiscal year 2008 and $330 billion in fiscal year 2009.”

What It Means

The important real estate question is very simple: Will FHA loans be available for financing and refinancing on a reasonable basis in the future?

The answer is that the FHA loans we will start seeing in a few months will be the same in the sense of little down and a requirement for fully-documented loan applications. But, expect annual mortgage insurance fees to rise from the current .55% for most borrowers (the up-front mortgage insurance fee has already gone from 1.75% to 2.25% and could go higher still). And, don;t be surprised if the required downpayment also goes up.

In other words, if you want an FHA loan now would be a very good time to consider such mortgages.

Full post as published by FHA Mortgage Guide on February 03, 2010 (boomark / email).