Loan Modification

FHA ? New Numbers Show Critics Wrong

By Peter G. Miller

The latest numbers to Congress from the FHA show that despite an historically-weak housing market — the worst since the Depression — the FHA loan program is surprisingly strong.

In a report to Congress by Bob Ryan, the FHA’s chief risk officer, it’s apparent that worries about the program are vastly overblown.

Claim: FHA reserves are running out. Nope. Not close. The real numbers look like this: The FHA’s Mutual Mortgage Insurance (MMI) fund now holds $33.1 billion — that’s up from $30.9 billion a year ago. This is the key reserve for FHA loans.

Claim: The FHA is the new subprime. Nope. Not close. A typical borrower had a 698 credit score, that’s up from 628 in 2007.

Claim: FHA guidelines create hideously-risky loans. Nope. Sorry. It turns out that the FHA loss projections were appropriately conservative — as they should be. That’s why the reserve fund is increasing and why, as well, that a mortgage insurance premium increase is unnecessary.

FHA Loans & Risk

The FHA is an insurance plan. The government doesn’t actually make “FHA loans,” instead it insures lenders from the private sector who make loans which meet FHA loan guidelines. Of, course, as we have seen lately, a large number of lenders have not met such guidelines and are no longer in the program.

If you’re in the insurance business you try to set premiums on the basis of expected claims. This is usually a conservative process because while a reserve surplus is okay a reserve shortfall is a disaster. Many have been claiming that the FHA forward loan program is failing and therefore taxpayer subsidies have been made or will be necessary.

Nope. Wrong. Not close.

The facts are these:

___ The FHA thought it would have 94,752 loan claims to this point. The actual number is 75,442 — that’s a 20 percent over-estimate.

___ The typical claim was supposed to be $13,041. The real number paid out for a typical lender claim is $9,381.

“Through the first three quarters of fiscal year 2010,” says the report, the “FHA has endorsed more than 1.3 million single-family loans, and is on pace to insure 1.7 million loans in the full fiscal year ending September 30. Home purchase mortgage insurance activity may itself surpass one million loans for the first time since 1987. At the same time, refinance activity has slowed sharply from its peak in the second quarter of 2009. Reverse mortgage insurance activity also is down substantially this calendar year, following reductions in cash take-out allowances (principal limits) implemented in October 2009 to assure that the program could be self-sustaining.”

It would be foolish to believe that HUD should not continue its conservative course, or that weak markets will end anytime soon. The housing market remains profoundly troubled, but while huge numbers of private lenders have failed the FHA loan program has actually seen reserve accounts grow and market share increase. That’s exactly the result you would want from a government insurance plan during tough times.

Full post as published by FHA Mortgage Guide on August 04, 2010 (boomark / email).