Delinquency Uptick a Red Herring in Argument over FHA Premium Cuts?


 Enlarge This Image

While Republican lawmakers are citing a recent report that delinquencies rose for loans guaranteed by the Federal Housing Administration as a reason to delay a premium cut, economists suggest the uptick is related to seasonal issues rather than longer-term threats to loan quality.

House Financial Services Committee Chairman Jeb Hensarling, R-Texas, cited a 72-basis-point spike in the delinquency rate, which reached 9.02% in the fourth quarter, according to Mortgage Bankers Association estimates, as justification for the Department of Housing and Urban Development’s decision to delay a planned premium cut.

“To be successful going forward, the FHA must be fiscally sound, with a clearly defined mission, to ensure homeownership opportunities for creditworthy first-time homebuyers and low-income families,” Hensarling said last week. “Thankfully, President Trump immediately recognized this danger and took decisive action on his first day in office.”

He added: “Lowering premiums at this time was a big mistake. The sudden increase in delinquencies makes it clear that President Trump was absolutely right to undo the previous administration’s irresponsible action.”

But the fourth-quarter increase was driven primarily by loans that are more than 30 days past due, which are usually volatile, particularly during the fourth quarter and holiday season. Analysts said the data was not a sign of concern.

“It is mostly a seasonal swing,” said Bing Bai, a research associate at the Urban Institute, during a conference call on Wednesday. “Even though it is a small uptick in the fourth quarter, it is still lower year over year from 2015.”

Unpublished FHA servicing data shows a 58-basis-point increase in the 30-day delinquency rate in the fourth quarter of 2016 to 5.15%. But the FHA data also shows the 30-day rate fell back to 4.84% in January, down from 5.22% a year ago.

Still, Mike Fratantoni, chief economist for the MBA, said it was “understandable the new administration would at least temporarily freeze” the FHA premium reduction. It was announced in the waning hours of the Obama administration and followed Republicans preemptively urging the FHA not to cut premiums further.

Fratantoni said there are a number of variables that the Trump people must sort through, including losses in the Home Equity Conversion Mortgage program.

“Not only do they need to consider the delinquency rates for FHA loans, they also must take into account the volatility in the HECM program, as well as other variables, that allowed the FHA capital reserve ratio to just meet the required minimum 2% threshold,” Fratantoni said.

If the Trump administration eventually approves the 25-basis-point reduction, it would lower the FHA annual premium to 60 basis points. The agency also charges a 175-basis-point upfront fee on FHA single-family loans.

Analysts said that an improving economy, rising wages and rising house prices bodes well for the FHA’s mortgage insurance fund.

“The good news is that there has been a steady decline in the serious delinquency rate for the last five years. It peaked at 9.92% in January 2012,” said Brian Chappelle, a mortgage consultant with Potomac Partners.

Leave a Reply