Let’s not bash the FHAby Peter Miller
For the last few years, it has been the FHA which has kept the mortgage marketplace afloat. FHA loans have consistently offered financing with little down, market mortgage rates and no gotcha clauses.
Now, however, some see doom ahead for the FHA program.
Writing in Bloomberg News, Jason Delisle and Christopher Papagianis said:
The FHA has some major accounting problems. Left unaddressed, they could spook the markets, lead the FHA to seek a federal cash infusion and further enrage taxpayers. These outcomes can be avoided–but only if policy makers are more transparent about the risks involved in guaranteeing mortgages.
As an example they point to FHA reserves:
As the housing bubble burst in 2007, and the number of mortgage-related defaults started to climb, the FHA’s capital reserves declined to $3.5 billion from $22 billion.
Well, sort of.
There are several important points which need to be raised here when discussing the FHA’s reserves:
First: The FHA has had losses because, generally, home values have declined as a result of toxic loans in which the FHA never originated. The same effect has been true with private mortgage insurance companies. Imagine that a home is bought with a $200,000 mortgage. If the price falls to $175,000, the loss is roughly $25,000. If the price goes down to $150,000, the loss is bigger.
Second: The FHA has dumped seller-assisted down payments, a major cause of past losses, and it has also raised the annual mortgage insurance premium (MIP) on new loans by 0.25 percent.
Third: About that $3.5 billion…It’s old news. Today’s news looks like this:
- In fiscal 2009, the FHA reserves took in an extra $565 million.
- In fiscal 2010, the FHA reserves grew by $5 billion.
- In fiscal 2011, the FHA is expected to generate so much additional cash from borrower premiums that it will ship $9.8 billion over to the Treasury. This is what the government calls a “negative subsidy.”
- In fiscal 2012, the FHA is projected to take in another negative subsidy, this time for $5.01 billion.
In terms of the big stuff, the FHA likely has one major task left to clean itself up:
It needs to shut down its reverse mortgage program.
It’s plain to see that the home equity mortgage conversion program is a great idea when home values are rising.
However, it’s a sure loser when home prices fall, and they have now been falling since at least April 2007.
Perhaps the more important point of the Bloomberg article is this:
When large portions of the economy fail, it doesn’t make a lot of sense to point fingers at one housing program.
It wasn’t the FHA that accepted loans with no doc loan applications, it was not the FHA who required prepayment penalties, it was not the FHA that designed loans, which in a large number of cases, were doomed to fail.
Moreover, the growth of the FHA in the past few years is not because the FHA has stepped up its marketing efforts.
It’s a good program
The FHA is an insurance program. It insures loans originated by lenders. If lenders do not originate loans that meet FHA standards–if they can find something better–then FHA numbers will fall.
The recent decision by the mortgage industry to support the retention of higher FHA loan limits in October instead of the lower limits which are scheduled to go into effect, should tell people something about the value of the FHA program.
It’s not just the mortgage rates which are good, it’s the entire program.
Peter G. Miller is syndicated to more than 100 newspapers and operates the real estate news site, OurBroker.com.