FHA Fund Expected to Improve, But Still Faces Struggles

Mortgage & Real Estate









WASHINGTON A report due next week on the Federal Housing Administration’s financial health is expected to show that the agency’s reserve fund has significantly improved over the past year.

The report, which is expected to be released at any time, is highly anticipated after the FHA made changes since the financial crisis in an effort to shore up its balance sheet.

During an appearance this week, Biniam Gebre, the FHA’s acting commissioner, touted the agency’s improvements, saying the agency has made great strides in revamping its single-family program.

FHA has restructured and raised its premiums, tightened underwriting practices, stepped up enforcement against bad actors and updated FHA’s loss mitigation practices to make sure families get “more help sooner,” Gebre said Thursday.

Those changes and other factors are showing up the performance of the FHA program.

“Over the past few years we have seen a 30% drop in serious delinquencies,” he said.

He also cited a 60% drop in foreclosure starts and more than a 68% improvement in recovery rates on REO and nonperforming loans. FHA is “back on track,” Gebre declared during a speech at a housing symposium sponsored by the Ballard Spahr LLP law firm in Washington.

Last year’s report already showed some improvement. The FHA’s mortgage insurance fund gained $15 billion, pushing its net worth to negative $1.3 billion, up from negative $16.3 billion a year earlier. The 2013 fiscal report said the capital ratio was at negative 0.11%.

Analysts and pundits expect this year’s report to show further improvement that will push the capital ratio to around 1%.

But the fund is not likely to hit 2%, the statutory minimum capital ratio.

During his remarks, Gebre did not comment on the pending actuarial report, but his upbeat assessment confirmed analyst expectations that the fund is improving but still faces challenges.

“It will, we expect, show that FHA is better, but not yet well,” according to a Federal Financial Analytics report issued Thursday.

The Washington analysts warned that the FHA single-family program faces headwinds going forward due to new competition from Fannie Mae and Freddie Mac.

FHA’s core business is insuring loans with down payments as low as 3.5%. But the government-sponsored enterprises are moving into that space.

“FHA could be adversely selected,” if it has to compete with the Fannie, Freddie and the private mortgage insurance companies, according to a Federal Financial Analytics report issued Thursday.

If Fannie and Freddie take all the high credit score business, FHA would be left with riskier borrowers and FHA would not be able to reduce its insurance premiums to be competitive, according to Basil Petrou, the firm’s managing director.

Losing the higher credit score business is “going to make it very tough for FHA to reach the 2% capital threshold anytime soon,” Petrou said in an interview.

Brian Chappelle, a mortgage consultant who co-founded Potomac Partners in Washington, said FHA will be fortunate if the insurance fund reaches 1%.

He noted that auditors projected last year that FHA would endorse $190 billion in single-family loans in FY 2014. But it now appears like loan endorsements will come in at $130 billion.

Chappelle also said that low mortgage rates have encouraged FHA borrowers to refinance into lower cost Fannie and Freddie loans. And the percentage of FHA borrowers refinancing into new FHA loans has dropped precipitously over the past few years.

“They are losing their best customers,” Chappelle said.

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