FHA In The Red
Someone get me the smelling salts, because I'm shocked, yes passing out over the latest headline from the FHA: "Officials Anticipate Annual Actuarial Study to Show Capital Reserve Ratio Dropping Below Congressionally-Mandated 2 Percent."
The writing has been on the wall, in red, for a good long time.
Last Tuesday, on this very blog, I wrote: FHA Claims It Won't Need Bailout.
When I put the question of undercapitalization to FHA officials last week, they sent me this very complicated statement, which you can go back and read, but which starts by saying they would not comment until they receive the actuarial study.
Today they say said study is "being completed."
Sept. 30th, I'm told, is the due date.
But lest I not get buried in semantics, I'll get to my point.
Last week they told methe same thing they're saying today, that they are undercapitalized, but still okay.
(Except last week they said they hold more than 5 percent of their insurance in force. Today they put that at 4.4 percent.)
"To be clear, the fund's reserves are sufficient to cover our future losses, so the FHA will not require taxpayer assistance or new Congressional action," said Commissioner David Stevens in a statement this morning. "That said, given the size and scope of the FHA and its importance to today's market, these risk management and credit policy changes are important steps in strengthening the FHA fund, by ensuring that lenders have proper and sufficient protection."
Ok, so why won't they need a bailout? Next paragraph:
"FHA's congressionally mandated capital reserve ratio...measures excess reserves above and beyond projected losses over the next 30 years. FHA continues to hold more than $30 billion in its reserves today, or more than 4.4 percent of it insurance in force."
So it's saying that it holds more than 4.4 percent of its insurance and yet 14 percent of its loans are past due?
Here's the explanation from uber mortgage consultant Howard Glaser:
"Not every delinquency results in a claim, and not every claim results in a full 100 percent loss. For example, a foreclosure on an FHA loan results in a recapture to the government of the value of that asset, so even when there is a claim they are getting 40, 50, 60 percent, whatever the value of the home is, but more importantly a delinquency doesn't automatically go to a claim; there's a big loss mitigation program at FHA, and they are pretty successful in winnowing those down, so the 4.5 percent capital is adequate to hold FHA even in times of economic stress."
Alright, understood, but to protect us already-beaten-down taxpayers, Commissioner Stevens is going to implement some changes, some tightened standards. They include higher average credit scores for borrowers, changes in refi requirements, and use of the new appraisal standards adopted by Fannie and Freddie , which Realtors and home builders claim are heavily hampering the housing recovery. And then for the FHA lenders, they're upping the bar, forcing them to have a net worth four times the original requirement. Will this make it slightly harder to get an FHA loan? Yep. Will that slow home purchases? Perhaps.
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Now I just have to get emotional for a minute: "Stevens also announced his intention to hire a Chief Risk Officer for the first time in the FHA’s 75-year history." Excuse me but where has the Chief Risk Officer been for the last 75 years? And more egregiously, where has said Officer been for the last two years, as FHA's share of the mortgage pie ballooned from 3 percent of the market to 25 percent and mortgage delinquencies and foreclosures rose to record levels??
I'm sorry, but that's inexcusable.
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