A troublesome signal just appeared in the housing market and could put taxpayers at risk.
Federal Housing Administration mortgage delinquencies jumped in the fourth quarter for the first time since 2006, the Mortgage Bankers Association reported Wednesday. The FHA insures low down-payment loans and is a favorite among first-time homebuyers.
The seasonally adjusted FHA delinquency rate increased to 9.02 percent in the fourth quarter from 8.3 percent in the third quarter, MBA data show. The jump, which followed the lowest delinquency rate since 1997, was driven by loans made since 2014 and early-stage delinquencies, those just 30 days past due.
It's too soon to know if it is a blip or a trend, but the jolt is clearly a warning.
"We had been experiencing great credit quality for so long, and to suddenly see this quarter-over-quarter reversal was a surprise, and we're looking closely at it," MBA CEO David Stevens said.
Now, the Trump administration will have to weigh the risks to the FHA portfolio against the weakening affordability in the housing market overall. Young, first-time buyers have largely been sidelined in the housing recovery, burdened by higher costs, tight credit and high levels of student debt. Home ownership is sitting at the lowest rate in 50 years.
"When we see a blip like this, we get concerned about whether that it is a trend," Stevens said. "And getting these premiums priced appropriately to provide access to home ownership — but also to protect the taxpayer — is that really important balance that the incoming secretary is going to have to focus on with his team to make sure we don't put the taxpayer at risk or the program at risk — and that's the challenge."
Barely a few hours after the inauguration, the Trump administration froze a move by the outgoing Obama administration that would have saved some lower-income borrowers money. It was a cut in the annual mortgage insurance premium on government-insured FHA loans.
The outgoing secretary of Housing and Urban Development announced plans to trim the cost just weeks before President Donald Trump took his oath. The move would have saved the average borrower about $500 a year and could have helped thousands more first-time and lower-income buyers purchase homes. The sudden freeze drew sharp criticism from Realtors and homebuilders who claimed it was overly cautious and burdensome.
The Trump administration defended the freeze in the FHA premium cut, saying only that, "more analysis and research are deemed necessary to assess future adjustments." That came in a letter signed by General Deputy Assistant Secretary for Housing Genger Charles. HUD Secretary nominee Ben Carson, who has still not been confirmed, addressed the last-minute move by the outgoing administration in his confirmation hearings.
"I, too, was surprised to see something of this nature done on the way out the door. Certainly, if confirmed, I'm going to work with the FHA administrator and other experts to really examine that policy," Carson said in response to a question from Sen. Patrick Toomey, R-Pa.
FHA delinquencies are still relatively low overall, and the cause of the spike is impossible to know for sure without more data. It could be an outlier, or it could be the result of lenders lowering FICO credit scores for recent borrowers. While FHA's minimum credit score is 580, lenders put their own overlays, or safeguards, on loans following the epic housing crash fueled by subprime lending. Average credit scores for new FHA loans were around 700 in 2010-2011. They have since fallen to around 675 in 2016.
"As we've seen the economy improve and home values rise and workforce job numbers continue to improve, some lenders have been more comfortable taking off some of those overlays, not going down to the lows that FHA allows, but it has brought credit scores down," said Stevens, who supported the Trump administration's freeze on the mortgage insurance premium cut. "FHA had just gotten back in the black, and we were concerned about unforeseen circumstances that could occur, so it doesn't surprise me that the Trump administration decided to act and at least slow down any look at reductions in [mortgage insurance premiums] until they really understand the portfolio."
The FHA insures loans and does not lend money. It requires just 3.5 percent for down payment, plus an upfront and annual premium. During the housing crash, it was the only low-down-payment loan available and is credited with saving overall home sales and assisting struggling borrowers to refinance into lower monthly payments. That, however, came at a price. The FHA's insurance reserves fell below the statutory mandate in 2013 and needed a $1.7 billion infusion from the U.S. Treasury.
With the reserves recovered and the FHA on far stronger footing, outgoing HUD Secretary Julian Castro announced the premium cut on Jan. 9, claiming the FHA could handle any additional risk.
"After four straight years of growth and with sufficient reserves on hand to meet future claims, it's time for FHA to pass along some modest savings to working families," Castro said. "This is a fiscally responsible measure to price our mortgage insurance in a way that protects our insurance fund while preserving the dream of homeownership for credit-qualified borrowers."
There were, however, signs as recently as last fall that FHA loans were beginning to fail at a higher rate. In October, ATTOM Data Solutions, a foreclosure sales and analytics company, reported the biggest jump in foreclosure activity since 2007, with FHA loans behind the surge.
"While some states are still slogging through the remnants of the last housing crisis, the foreclosure activity increases in states such as Arizona, Colorado and Georgia are more heavily tied to loans originated since 2009 — after most of the risky lending fueling the last housing boom had stopped," said Daren Blomquist, senior vice president at Attom Data Solutions.