The FHA is on the rebound, but changes are neededby Peter Miller
“No serious observer of the Federal Housing Administration (FHA) believes its financial future is bright,” writes Peter J. Wallison and Edward J. Pinto in a recent market outlook titled, “Bet the house: why the FHA is going (for) broke.”
The FHA seems to be getting better, not worse
However, a serious market observer might disagree, countering that the financial future of the FHA is a lot better than it used to be. The facts are these:
- The down-payment requirement has been increased from 3 percent to 3.5 percent
- More than 1,500 lenders who did not meet FHA standards have been tossed out of the program
- As a result of congressional action, the FHA annual insurance premium will be raised under the two-month extension of the payroll-tax reduction
- Claims against the program are going down
According to November’s FHAs Outlook report, the latest available at the time of this writing, there have been 42,593 claims against the insurance plan since Oct. 1, the start of the fiscal year. During the same period last year, there were 54,586 claims. That means claims are down 22 percent.
One might also look at the FHA’s book of business to get a sense of how the program is currently performing and how it has performed in the past. This is, essentially, the financial result of the loans originated in a given year. From 1992 through 1999, the results were all positive. From 2000 through the start of 2009, the results were negative. Beginning in 2009 and through 2011, the results are again positive.
FHA expected to be “very profitable”
There are $26 billion in anticipated losses from the period before 2009. “Conversely,” said HUD in November 2011, “the actuaries found that the FY2010 and FY2011 books are expected to be very profitable, providing significant net revenues to offset losses on earlier books.”
What happened to change the loss picture at the FHA?
Well, there are the higher-down-payment requirements and the tougher standards for lenders, but the real change is that seller-funded down payment assistance loans have been eliminated.
The FHA has a very tough down payment rule. It says that down payment money must come from the buyer’s funds or from a gift or grant. In the days when the private sector was offering toxic loans, many buyers wanted to purchase a home but did not have 3 percent down or a gift from a family member. Some sales were arranged so that the seller made a donation to a charity and the charity would make a gift to the buyer who could then qualify for an FHA loan.
Blaming today’s FHA for the results of past policies that are no longer in place hardly seems reasonable.
The FHA needs to change
The FHA needs to dump its reverse mortgage program. It’s a loser. There have been 1,367 claims under the FHA’s reverse mortgage plan so far in fiscal 2011–that’s up 66.7 percent from a year ago. With declining home values, the odds of continuing losses are huge.
In other words, rather than dump the entire FHA program and the millions of people it serves, make selected changes.
Surely the AEI would want the private sector to step forward and provide the insurance reverse mortgage lenders require. Here’s a real chance to show the private sector at work and–just like the FHA–for private insurers to provide 100-percent coverage to lenders in case of losses, to provide competitive mortgage rates and to insure just as many loans as the FHA.