To Stem Losses, FHA Mortgages Get More Expensive

FHA May Show Negative Reserves For Mortgage Losses
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The federal agency that some credit with saving the housing market during the worst of the recent crash, may now be in need of taxpayer help itself. The Federal Housing Administration (FHA), which insures more than $1 trillion worth of home mortgages, is looking at $16.3 billion in losses, according to an annual audit released today.

"This does not mean FHA has insufficient cash to pay insurance claims, a current operating deficit, or will need to immediately draw funds from the Treasury," according to a release from the Department of Housing and Urban Development (HUD). "The need to draw on Treasury funds is determined not by the economic assumptions of this actuarial review but those used in the President's FY 2014 budget proposal to be released in February, with a final determination on a potential draw made in September."

"While the loans made during this Administration remain the strongest in the agency's history, we take the findings of the independent actuary very seriously," said FHA Acting Commissioner Carol Galante in a statement. "We will continue to take aggressive steps to protect FHA's financial health while ensuring that FHA continues to perform its historic role of providing access to homeownership for underserved communities and supporting the housing market during tough economic times."

To that end, HUD announced a series of changes, "that are designed to build on previous steps that have improved the health of the Fund." These include:

  • Increasing the annual insurance premium paid by borrowers on new FHA loans in 2013. This should add $13 per month to the average borrower's bill
  • Continuing to sell expanded pools of defaulted mortgages that are headed for foreclosure
  • Revising its loss mitigation program to offer more payment relief to struggling borrowers
  • Expanding the use of short sales (selling the home for less than the value of the loan)
  • Reversing a policy to cancel premium payments after a certain period of time.

The FHA losses stem from business it did between 2007 and 2009, when the rest of the mortgage market retreated dramatically. $70 billion in claims are attributable to just those three years when seller-funded downpayment assistance was still allowed. That was prohibited in 2009.

(Read More: FHA May Show Negative Reserves For Mortgage Losses)

The FHA, which requires just 3.5 percent down payment on a loan and which had lower relative credit score requirements, went from just 2 percent of the market during the height of the housing boom to nearly 40 percent at the height of the crash, insuring $330 billion worth of mortgages in 2009 alone. It has recently shrunk its share to around 15 percent of the market, by raising premiums and credit requirements.

"While there is no doubt that the housing finance system needs to be reformed, the contributions that the FHA has made during this economic downturn underscore the need for a government backstop for both the primary and secondary mortgage markets," noted Barry Rutenberg, chairman of the National Association of Home Builders in response to news of the FHA's shortfall. "Without government support for home purchasing and refinancing, the nation's mortgage markets will grind to a halt, throwing the economy back into recession."

In contrast to the loans insured from 2007-2009, the FHA's recent book of business has been quite healthy, providing billions in net revenues to offset earlier losses, though clearly not enough. According to the annual review, the 2013 book of loans should add $11 billion in value to the fund.

(Read More: Why Home Refinancing Boom Is Different This Time.)

There are, however, concerns that impending new rules in the mortgage market, dictated by Dodd-Frank financial reform, will make the overall loan market more expensive and drive more borrowers to the FHA. Most agree FHA's share of the market should shrink.

(Read More: Ready for the Land Mines Embedded in Dodd-Frank?)

"The best medicine for FHA is a steadily growing housing market with stable home price appreciation, a less likely outcome if the rules cause lenders to increase cost or tighten qualification requirements for borrowers," said Debra Still, chairman of the Mortgage Bankers Association.

Sector Watch: US Home Builders

—Toll Brothers

—DR Horton

—Hovnanian Enterprises


—Ryland Group

—Lennar Corp

—Beazer Homes USA

—Meritage Homes

—KB Home

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