Well, the U.S. Department of Housing and Urban Development (HUD) finally released its long anticipated annual report to Congress today, revealing the need for more changes to stay financially independent.
The actuarial study found that the capital reserve fund, which supports the FHA’s single family mortgage and reverse mortgage insurance programs, fell below zero, to -1.44%, representing a negative economic value of $16.3 billion.
The FHA continues to be hurt by seller downpayment assistance loans, which allowed borrowers to buy homes with nothing down, and really, nothing at all out-of-pocket. We’re talking no costs loans on steroids.
Clearly this was a terrible and completely irresponsible way of doing lending, and it has rattled the FHA’s finances year after year.
These loans, which were originated between fiscal years 2007 and 2009, have resulted in about $70 billion in losses for the FHA.
Additionally, the low mortgage rates are also hurting the FHA because of the rapid rate of refinancing among FHA borrowers, though only on a short-term basis.
Essentially, it costs the FHA money when borrowers refinance their mortgages to lower market rates, at least in the near term. However, over time this should help their expected default rate as borrowers will have more manageable payments.
Along with that, FHA borrowers who aren’t able to refinance to today’s extraordinarily low rates will be more inclined to default, thereby increasing losses from projected foreclosures.
The FHA also blamed less favorable home-price appreciation forecasts used for this latest study, and noted that their methodology for predicting losses also hurt the economic value of the insurance fund.
No Treasury Draw Needed, Yet
Despite all this, HUD said it doesn’t need to call on the Treasury for a bailout just yet.
The need for a draw will be determined in the President’s fiscal year 2014 budget proposal, which will be released in February.
And in the meantime, the actuary behind the study believes the FHA’s fiscal year 2013 book of business will add $11 billion in capital accumulation.
Long story short, the FHA cleaned up its act a lot in recent years, and most of the loans it originates are of much higher quality.
We’re talking higher credit scores, lower loan-to-value ratios, and better underwriting.
This is partially because of a shift in borrower demographics, as more creditworthy borrowers turned to the FHA after conventional lending became more stringent and harder to come by.
Still, the FHA endorsed roughly 734,000 purchase mortgages over the past year, including 78% to first-time homebuyers.
Additionally, the FHA insured about half of all home purchase mortgages to African American and Hispanic/Latino borrowers.
More Expensive FHA Loans in 2013
And now the bad news, for prospective homeowners. Beginning in 2013, the FHA will raise the annual insurance premium paid by borrowers on new FHA loans by 0.10%.
It’s not a lot, but it will add an additional $13 per month to the average borrower’s mortgage payment. And premiums have already increased several times in the past year or so.
In other words, new borrowers will continue to pay for the irresponsibility of past years, but if you want to put down just 3.5%, they’re the only game in town.
On top of that, the FHA plans to reverse a rule that allows borrowers to cancel mortgage insurance premiums after only five years, despite the fact that the underlying loans are still insured for the full term of 30 years.
The agency will also shore up losses by continuing to sell pools of defaulted mortgages, those sailing toward foreclosure, with a commitment to sell at least 10,000 per quarter next year.
They will also expand the use of short sales and revise their loss mitigation program to “target deeper levels of payment relief.”