Loan Modification

FHA Insurance Likely To Remain Low As Reserves Improve

By Peter G. Miller

For the past year or so various critics have said that the FHA would soon need taxpayer money to support its programs. Such dour predictions have turned out to be wrong, happy news for those who pay — or hope to pay — FHA mortgage insurance premiums.

Speaking before the House Financial Services Committee last week, FHA Commission David H. Stevens said that instead of a loss, the FHA’s Mutual Mortgage Insurance FUND (MMI) actually has grown.

“Last year at this time,” sais Stevens, “the independent actuaries predicted that we would draw down $2.6 billion of capital resources over the first three quarters of this year to pay for rising claim expenses. As noted in our third quarter MMI Fund report to Congress, instead of decreasing by $2.6 billion, net income increased by $450 million. Once we add interest earnings to core insurance income, our capital resources grew by $1.3 billion in the first three quarters of this fiscal year.”

Instead of the predicted $2.6 billion loss FHA wound on it’s forward mortgage program, the government wound up with an additional $1.3 billion — that $3.9 billion more in total than doom sayers predicted.

FHA Mortgage Insurance

This is important for FHA loan borrowers because if reserves fall to the point where taxpayer help is needed you can bet that up front and annual mortgage insurance premiums will rise, meaning there would be fewer FHA loans.

“The positive signs we are seeing are due,” Stevens explained, “in large part, to the numerous reforms put in place and actions the FHA has taken over the last year, including an increase to insurance premiums in April and the suspension or withdrawal of approval for 1,500 lenders from doing business with FHA. This does not yet account for the additional authority to change our annual premium structure passed by Congress that will add an estimated $300 million per month to the FHA fund.”

Cash On Hand

Last year Stevens told the Congress that the “FHA’s secondary reserves had fallen below the required two percent level — to 0.53 percent of the total insurance-in-force.” This was not the entire story however because the FHA had another set of reserves held in something called the “Financing account.” Add the two accounts together and you get “more than 4.5 percent of total insurance-in-force in reserves — $31 billion set aside specifically to cover losses over the next 30 years.”

A year ago there were many predictions which suggested that the FHA was falling apart and would soon need taxpayer dollars to underwrite the program. Nope, Hasn’t happened.

Instead, what’s happened is that the FHA has reduced risk and increased premium income. Rather than getting smaller the program’s reserves have actually grown. To accomplish such results some lenders are gone and some borrowers can’t get in — relatively low costs to preserve a mortgage insurance plan which has functioned well for 75 years.

Full post as published by FHA Mortgage Guide on September 27, 2010 (boomark / email).