Report shows an FHA in serious trouble

Ticking money bombThe report is in. It’s not good.

The “Annual Report to Congress Regarding the Financial Status of the FHA Mutual Mortgage Insurance Fund Fiscal Year 2012” shows the FHA’s reserve fund has fallen to -1.44 percent—far below the 2 percent cushion mandated by Congress, and may open the door to the first infusion of government cash in the insurer’s 78-year history.

HUD Secretary Shaun Donovan explained in the report’s forward that there are three main factors behind the decline in the reserve fund:

  1. Home price assumptions. You know what they say happens when you assume… Basically, the home price appreciation estimates used for this year’s study are far lower than what was used last year. According to HUD, this reduced their fund’s value by an estimated $ 10.5 billion. (Also, this report doesn’t take into account any home price appreciations since June of this year.)
  2. Low mortgage rates. This is a great example of how low interest rates work in a borrower’s favorite, they’ve ended up hurting the FHA. The FHA loses out when more borrowers pay off their loans or refinance to lower interest rates. Also, when borrowers with higher interest rates find themselves unable to refinance, the chances of defaults, strategic or not, increase. According to the report, “These effects of continued low interest rates result in a reduction of $ 8 billion in estimated economic value for the Fund, versus what was anticipated in last year’s report.”
  3. Reported losses. Lastly, an estimated $ 10 billion reduction in the fund’s value resulted from a change in the way losses from defaults are reflected.

It’s important to note that the decision to inject federal money won’t be made until February 2013 when the president releases his fiscal year budget for 2014.

Change is here, change is coming

In the meantime, the FHA has announced “a modest increase to FHA’s premiums.” The increase is two-fold: it will add revenue to the fund and serve to limit the FHA’s market share by increasing costs.

Also, the FHA has called upon Congress to approve several proposals the FHA says will “place FHA in a stronger fiscal position over the next twelve months and into the future.”

Here are the proposals (directly from the secretary’s forward):

  • Additional authority to ensure that FHA borrowers are receiving the level of delinquency assistance they deserve from their servicer,
  • Stronger and more flexible enforcement authorities so that FHA can identify noncompliance and poor performance and take action to avoid losses, and
  • Additional authority to manage the reverse mortgage (HECM) program so that consumers are better protected and able to retain their homes.

There are some bright spots, however, in this 2012 report: The loans which are putting the greatest financial stress on the FHA are from prior to 2010. According to the report, there are “$ 70 billion in future claim payments attributable to the 2007-2009 books of business alone.” A majority of the FHA’s more recent business is performing quite well.

HUD is remaining positive that a Treasury bailout won’t be necessary. “Coupled with the $ 11 billion in additional capital from expected new insurance guarantee volumes in FY 2013, we believe it is possible to return the MMI Fund capital ratio to a positive level within the year, and reduce the likelihood that FHA will need to call upon the Treasury for any special assistance this fiscal year.”

HSH Associates Financial News Blog

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