Well, it took 79 years, but the FHA’s squeaky-clean track record is over.
FHA Commissioner Carol Galante wrote a letter to Congress formally requesting a bailout from the Treasury, the first time the agency has ever had to go down that road.
And it’s no small number either – the government housing agency needs a staggering $1.7 billion to meet the capital requirements of its depleted Mutual Mortgage Insurance Fund.
However, Galante stressed that the money wasn’t necessary to handle claims activity, and that the agency has “more than sufficient resources.”
In other words, the money is only necessary to keep the capital reserve ratio above two percent, with the money being transferred before the fiscal year ends on Monday September 30th.
Of course, just like any other company that insures mortgages, the last five or so years have been rough.
High-Risk Loans Crushed the FHA
The agency originally lost its shirt on seller-paid down payment assistance loans, which allowed borrowers to purchase homes with absolutely nothing down.
As we all know, those who had nothing to lose eventually walked away from their homes when values went south.
And more recently the FHA registered $5 billion in losses through its troubled reverse mortgage program, in which seniors took huge draws and eventually defaulted on the mortgages tied to homes worth considerably less.
Still, the worst seems to be over, as indicated in testimony before the Senate Committee on Banking in late July of this year.
At that time, Galante said serious delinquencies on FHA loans fell from 9.59% in December 2012 to 8.27% in May 2013, and noted that cures (where bad loans get back on track) began surpassing new serious delinquencies in April of this year.
So it’s more about playing catch-up to meet a Congressionally-mandated rule related to old data, not so much a sign of the times.
FHA Loans Are More Expensive Because of the Mess
The FHA has already made a ton of changes to bolster reserves, namely charging new borrowers a lot more than they used to.
This includes more expensive upfront and annual mortgage insurance premiums, and insurance that stays in force a lot longer.
And the latest change requires many FHA borrowers to pay mortgage insurance premiums for the full term of the loan, even if the LTV ratio drops to 78%.
A couple of years ago the agency also introduced a minimum credit score of 500, and upped the credit score requirement for its signature 3.5% down loan program to 580.
In short, today’s FHA borrower is paying the price for the mistakes made leading up to the housing crisis, which while seemingly unfair, is the only move the agency can make at this point.
Unfortunately, FHA lending has gotten a lot less popular due to these changes, which is a bit of a catch-22 for the agency.
Galante blamed higher mortgage rates for the recent reduction in loan volume, which apparently led to the request for the bailout. But let’s be honest, conventional loans make a lot more sense for borrowers these days in light of all those premium hikes.
Wait, the FHA Still Doesn’t Get It?
In spite of all this, the FHA is still engaging in highly questionable lending practices today.
Many of these borrowers will be able to apply for FHA loans just one year after such a massive event, so long as they can jump through a few underwriting hoops.
This has bad idea written all over it, but the FHA is moving forward with the initiative. The question remains whether lenders will play ball, or simply throw overlays on top of it.
It’s clearly irresponsible, but I suppose we don’t know if the FHA is getting pressured to keep the spigot open for less creditworthy borrowers, which after all, is their original mission.