The Federal Housing Administration’s capital reserve ratio has fallen below statutory minimums, but the government mortgage insurance program will not require a taxpayer bailout unless the economy becomes mired in a depression, officials said.
In releasing the results of an independent actuarial study, Housing Secretary Shaun Donovan and FHA Commissioner David Stevens today said that in the event of a second severe recession, FHA’s capital reserves would be wiped out, but premiums from insurance written in coming years would be sufficient to cover losses.
FHA won’t require a taxpayer bailout unless the nation enters a protracted economic recession where mortgage rates fall to 2 percent and stay there for three years, the actuarial study found. In that scenario — which doesn’t take into account that FHA would likely see a boost in premiums from refinancings — taxpayers would have to loan FHA $1.6 billion in 2012 to cover claims.
Anticipating that FHA’s capital reserve ratio would fall below a 2 percent minimum established by Congress for the first time since the cushion against losses was achieved in 1995, FHA announced in September that it would tighten credit standards and implement new rules for appraisals on Jan. 1 (see story).
FHA had also proposed tightening rules for condo approvals beginning Oct. 1, but has relaxed some of the proposed restrictions and delayed implementation until Dec. 7 (see story).
In releasing the actuarial study, Donovan said seller-funded downpayment assistance loans were FHA’s most substantial pool of troubled loans, with claim rates 2.5 to three times higher than other loans.
The structure of the program — in which homebuilders funded nonprofits that covered FHA’s minimum downpayment requirements on new-home purchases — encouraged fraud and abuse, the Department of Housing and Urban Development (HUD) claimed.
FHA anticipates that it’s facing $10.4 billion in claims on loans made with seller-funded downpayment assistance, on top of losses already sustained. If FHA hadn’t guaranteed loans with seller-funded downpayment assistance, the capital reserve ratio would still be at 2 percent, HUD said.
With seller-funded downpayment assistance on FHA loans abolished by Congress in 2008 (see story), other risks to FHA include the tremendous growth in the number of loans it guarantees, the migration of subprime lenders to FHA, and an economic decline more severe than the base scenario, Donovan said.
In the 12 months ending Sept. 30, FHA insured 995,590 purchase loans and 836,528 refinances — almost 30 percent of total purchase loans and 20 percent of total refinances in the housing market, HUD said. …CONTINUED
Nearly 80 percent of FHA-backed purchase loans were to first-time homebuyers, and in the second quarter of 2009 nearly 50 percent of all first-time buyers in the entire housing market used FHA-insured loans, HUD said.
FHA plays a "countercyclical" role, keeping money flowing into mortgage lending during tough times, and Donovan said the Obama administration is "committed to ensuring that the FHA steps back as private capital returns to the market."
FHA expects that the loans it’s insured since January will provide net revenues — that premium payments will exceed claims payments.
While only 1.6 percent of loans insured in 2009 are seriously delinquent, the rate for loans insured in 2007, on the cusp of the downturn — is 18.53 percent. All told, 8.52 percent of the single-family loans FHA insures are seriously delinquent — meaning they are more than 90 days past due, or borrowers are in bankruptcy or foreclosure.
While that’s higher than the delinquency rate on prime mortgages, the seriously delinquent rate on subprime mortgages is about 2.4 times higher, HUD says.
After FHA faced similar difficulties in the 1980s, in 1990 Congress enacted a requirement that FHA maintain a capital reserve account it could draw on in times of economic stress. Lawmakers mandated that FHA build up a capital reserve account equal to 2 percent of insurance in force by the year 2000 — on top of a financing account that holds reserves to pay forecasted claims over the next 30 years.
FHA achieved that target in 1995, and as recently as the fall of 2008 the capital reserve ratio was 3 percent. The new actuarial review projects that under a baseline scenario in which home prices fall 14 percent from peak to trough, the capital reserve ratio has shrunk to 0.53 percent.
But the capital reserve account and the financing account combined hold $31 billion in total reserves today, or more than 4.5 percent of total insurance in force.
If the nation enters a second severe recession, and home prices instead fall 25 percent peak to trough (as measured by the Federal Housing Finance Agency index), the reserve capital ratio will be wiped out but revenue from incoming premiums would be sufficient to cover claims, the actuarial report found.
Taxpayer assistance will be required only if the peak-to-trough drop in the FHFA index reaches 35 percent — the equivalent of a 50 percent decline in the Standard & Poor’s Case/Shiller 10-city composite, the report said. The "depression" scenario also assumes unemployment hits 12.5 percent, compared with 11 percent in the "second severe recession" scenario.
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