After bleeding cash for the past two years, the government insurer of home loans, the Federal Housing Administration, is now seeing significant gains in its insurance fund and will no longer need emergency cash. It is not, however, lowering the cost of an FHA loan for consumers.
"I'm pleased to report the fund is back in the black, and it's on a strong track," said Julian Castro, U.S. Secretary of Housing and Urban Development in a briefing before a small group of reporters on Monday morning.
The FHA, which requires down payments as low as 3.5 percent, stepped into the mess left by the housing crash. Its volume soared to about a third of all loan originations during the worst of the recession, when the private mortgage market collapsed. That, however, came at a price. By 2012 its insurance fund had gone negative, with the fund projected at negative $16.3 billion; it was then required to take a cash draw from the U.S. Treasury to cover losses.
"FHA has taken several prudent actions to improve the fiscal health of the fund, and those actions have led to the stronger position that we're in today," said Castro.
The agency has more than doubled its annual insurance premiums as well as raised the average credit score for its borrowers. The value of the mortgage insurance fund has increased by $21 billion in the past two years, and now stands at $4.8 billion in value. FHA's capital reserve ratio is now at 0.41 percent, well below the required 2 percent level, but in the positive. It is now projected to clear 2 percent by 2016.
FHA's recovery is thanks to what officials call an "aggressive policy action." In addition to the higher premiums, the agency has gone after lenders that don't follow FHA underwriting guidelines. Delinquency rates have improved by 14 percent and recovery rates by 16 percent, according to FHA.
However, it has also seen a sharp drop in volume, with loans backed by the smaller Department of Veterans Affairs now surpassing its weekly application volume. That is due to the high premiums and strict underwriting. Fannie Mae recently announced the return of its 3 percent down payment loan product, but Castro did not seem concerned that it would cut further into FHA's volume. He would not comment on whether FHA would consider lowering its annual premiums.
"We're confident that the fundamentals of the fund are strong. The volume is down, there's no question about that, but we are confident of the continued health of the fund going forward," said Castro.
Credit availability has plagued the overall mortgage market this year, keeping thousands of first-time and lower creditworthy borrowers out of the housing recovery.
"The changes they've made are protecting the taxpayer," said Brian Chappelle, a mortgage consultant at Potomac Partners. "The concern is the impact on future homebuyers."
Chappelle also points to a lack of fundamental fairness: FHA borrowers today are the best the insurer has had in 30 years, but they are also paying the highest premiums.
FHA officials said they are working on clarifying guidelines to lenders, so that lenders might remove some of the pricey "overlays" they are imposing on borrowers to account for risk. Agency officials are also implementing a program next year where borrowers can reduce their monthly premiums if they submit to credit counseling.
While the FHA's insurance fund is clearly on the mend, its reverse mortgage program (HECM), which allows seniors to draw on their home equity, is not faring as well. It is, in fact, now losing money again.
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"The HECM program remains fairly volatile. We continue to make fundamental changes to the program," said HUD officials in a background briefing.
While the housing industry continues to cry for more credit, independent actuaries have lowered their predictions for FHA volume in the coming years. Overall new mortgage volume is still running significantly lower than historical norms, and with all-cash investors making up a smaller share of buyers today, the housing recovery is slowing in tandem.