The bad loans of the housing boom are still bad, but the new loans from today's tighter mortgage market are so much better that they're offsetting the trouble. That's the message from the Federal Housing Administration in its annual report to Congress.
The FHA, currently the only low down payment option around, provided access to credit for close to 40 percent of purchase mortgages in the past year.
"FHA’s study finds that since last year, the capital reserve ratio held steady, insurance claims declined significantly, and the economic value of FHA’s single-family insurance program grew by more than $1 billion, from $3.6 billion in 2009 to $4.7 billion in 2010," leads the report.
The FHA has instituted several reforms recently, raising rates, standards and prices for borrowers as well as policing FHA lenders far more stringently. Those changes will likely contribute to better performance in the future, although the FHA's report claims the 21 percent drop in insurance claims in FY 2010 came well before those changes.
The FHA, which insured $319 billion in single-family mortgages in FY 2010, second only to FY 2009's volume, is still bleeding cash from its pre-2009 book of business. "Seller-financed down payment assistance loans" which are now prohibited, "produced $6.6 billion in claims to-date and may ultimately cost FHA $13.6 billion." They are the primary reason the FHA's capital reserve ratio, which measures reserves in excess of those needed to cover projected losses over the next 30 years, sits at .50, well below its congressionally mandated threshold of two percent of all insurance-in-force. That's the bad news; the good news is that the ratio didn't mover much from .53 last year, and reserves rose, as noted above. The ratio fell because the FHA is insuring more loans now.
But here's what I find most interesting in the reportabout that change from .53 to .50:
The difference is primarily attributed to the use of much more conservative assumptions regarding future house price growth than were used last year, which also resulted in an $8.5 billion decrease in economic value. However, that decrease was offset by a variety of factors, including an $8.7 billion increase in value due to better credit quality, loan performance, and the premium increase implemented earlier this year.
So the auditing firm (Integrated Financial Engineering of Rockville, MD) decided that home prices would, in fact, deteriorate.
It's not like we haven't been saying that all along, but it's interesting to hear it from such an important entity projecting the future financial health of a major government agency.