Is FHA the next housing bailout?by Peter Miller
The FHA is making headlines again with worries that the entire program is mired in financial trouble. The title of this post is the same title of a study supported by the American Enterprise Institute, a conservative think tank, which argues that the federal home insurance program could need more than $50 billion in taxpayer money to maintain needed reserves.
Alternatively, despite the worst real estate market in decades, the latest FHA annual report shows with real numbers and results that the program is actually doing fairly well:
- Loans worth more than $1 trillion are now backed with FHA insurance
- In the last fiscal year–the period that ended September 30th–440,000 borrowers refinanced with FHA loans. The average savings was $160 per month
- The FHA reserve fund actually increased by $400 million last year to $33.7 billion
HUD says the reserve fund will increase and meet required levels by 2014. But the real question is whether there is sufficient cash to pay FHA claims–that $50 billion mentioned above.
If homes nationwide continue to lose value, then the reserve problem becomes more acute, not just for the FHA program but for private mortgage insurers as well. The reason is that mortgage insurance plans–whether private or public–have always benefited from rising prices. Each time home values rise, insurers and lenders have less risk.
The FHA had changed
That said, today’s FHA program is different than it used to be. Annual premiums and down-payment requirements have increased and seller-funded down payments are no longer allowed.
These changes make a big difference, says HUD.
HUD points out that FHA losses for loans originated between 2000 and the first quarter of 2009 will likely lose $26 billion–$10 billion in just 2008. According to HUD, between the second quarter of 2009 and 2011, an estimated net income worth $18 billion will be generated.
In other words, the FHA has changed, and with it, potential liabilities and reserve claims.
But the FHA may be more than right. In the same way that reduced home prices hurt mortgage insurance plans, better mortgage rates help insurance plans. The fact that we are at or near historically low mortgage financing is a huge boost–as rates go down people refinance. When they refinance, monthly costs are reduced and lower mortgage payments equal less FHA risk.
Refinancing can only help
If 440,000 borrowers are saving an average of $160 a month, that’s a gross savings of more than $70 million a month. You can bet that some borrowers, who might have been foreclosed on if not for a refinance, are today making their payments on time because their loans are more affordable.
The FHA says that in fiscal 2011 it was able to reduce payments for 142,000 distressed homeowners. The typical reduction was $85 a month–that’s an 11 percent average savings. It’s also $1,000 a year.
FHA mortgage rates continue to remain a good deal lower than conforming rates. According to recent figures from HSH.com, the interest rate spread between conforming 30-year fixed-rate mortgages and 30-year FHA loans was 0.20 percent. This may explain in part why the FHA program now represents about 30 percent of all mortgage underwriting.
As for future FHA bailouts, despite claims and estimates to the contrary, the view here is that such taxpayer assistance seems very unlikely.
What do you think—is FHA the next housing bailout?