FHA Watch, February 2012

FHA Watch, now in its second issue, focuses on the government’s taxpayer-backed Federal Housing Administration (FHA) mortgage guarantee program, the risks it poses for taxpayers, families and communities, and the opportunities for reform that lead to sustainable homeownership and a fiscally sound FHA Mutual Mortgage Insurance Fund.

Check out the Denial Dial, with figures updated each month, for a quick visual of the FHA’s capital position.

Check out the Road Map to FHA Reform for a quick summary of the steps the FHA needs to take to achieve both sustainable homeownership and a fiscally sound Mutual Mortgage Insurance Fund. 

Read Issue 1, January 2012.

This Month’s Features

Spotlight on Insolvency
FHA Is Estimated to Have a Current Net Worth of –$14.74 Billion and an Estimated Capital Shortfall of $33–52 Billion

Spotlight on Delinquency
Total Delinquency Rate in January Eases to 17.53 Percent; Serious Delinquency Rate Increases to 9.92 percent 

Spotlight on the Impact of Unsustainable Lending Practices on Families and Neighborhoods
About 30 Percent of FHA’s Recently Insured Loans Have Layered Risks Resulting in a 15 Percent or Higher Expected Claim Rate  

Spotlight on Delinquency Hot Spots
Georgia and New Jersey Continue to Top the List of States with the Highest FHA Total Delinquency Rates

Spotlight on the Road to FHA Reform
Policy Changes Needed to Implement Reform Principle 1 

The Road Map to FHA Reform
Specific Steps for Reform and the Status of Each

 

Spotlight on Insolvency
FHA Is Estimated to Have a Current Net Worth of –$14.74 Billion and an Estimated Capital Shortfall of $33–52 Billion

Table 1 presents an estimate of FHA’s current financial condition under rules applicable to a private mortgage insurer (PMI). This assumes such an insurer had the FHA’s delinquent loans, risk exposure, capital resources, and an applicable capital requirement of either 2 percent or 4 percent.[1] 

In issue 1, FHA Watch estimated that the FHA’s net worth under PMI rules had deteriorated by approximately $4.7 billion from September 30, 2011 to December 31, 2011. (See table 1.) Between September 30, 2011, and January 31, 2012, the FHA’s net worth deteriorated by approximately $5 billion, notwithstanding cash infusions estimated at $600 million from lender settlements.[2]  

This substantial deterioration in the FHA’s financial condition over a short time period was recognized in the February release of HUD’s FY 2013 budget, where the FHA was noted to be at risk of exhausting its reserves and the estimated date for the FHA achieving its mandatory 2 percent reserve level was changed from the 2014 (as reported in November 2011) to 2015.[3]

The FHA as a PMI. Table 1 shows what a PMI such as Genworth would look like if it had the FHA’s delinquent loans, risk exposure, capital resources, and capital ratio (under both the 2 percent statutory requirement for the FHA and the 4 percent of risk-in-force requirement applicable to private mortgage insurers).

Table 1. Insolvency Watch ($ Billions)



Date
FHA's "Capital Resources" (Assets)
Cash Flow since Sept. 30, 20111
Estimated Loss Reserve (Liabilities on PMI Basis)
Current Net Worth (PMI Basis)

Required
Capital
Ratio
Required Capital under Applicable Ratio2
Current
Shortfall
(PMI Basis)
  Sept. 30, 2011 (rev.) $28.18 $37.95 –$9.77 2% $18.15 –$27.91
  Sept. 30, 2011 (rev.) $28.18 — $37.95 –$9.77 4% $36.29 –$46.06
  Dec. 30, 2011 (rev.) $28.18 –$0.648 $41.99 –$14.46 2% $18.47 –$32.93
  Dec. 30, 2011 (rev.) $28.18 –$0.648 $41.99 –$14.46 4% $36.94 –$51.40
  Jan. 31, 2012 $28.18 –$0.264 $42.66 –$14.74 2% $18.61 –$33.36
  Jan. 31, 2012 $28.18 –$0.264 $42.66 –$14.74 4% $37.22 –$51.97
Notes: A more precise figure for reserves as a percentage of risk-in-force is now being used from Genworth, Quarterly Financial Supplements, Delinquency Metrics-US Mortgage Insurance Segment, http://phx.corporate-ir.net/phoenix.zhtml?c=175970&p=irol-quarterlyreports (accessed February 8, 2012). All figures in table 1 are calculated using this updated methodology. September 30, 2011 and December 31, 2011 figures are revised from issue 1.
1. The FHA's negative cash flow was $216 million per month during FY 2011. See exhibit II-2, US Department of Housing and Urban Development, Actuarial Review of the Federal Housing Administration, 14. The FHA's forward single-family Mutual Mortgage Insurance Fund (MMIF) is expected to receive approximately $600 million from two settlements with lenders, which amount is added to January's cash flow.
2. Total based on the FHA's total amortized risk in force net of loans covered by loan loss reserve of $907.2 billion ($1.009 trillion − $101.8 billion) and $930.6 billion ($1.045 trillion − $114.4 billion) as of September 30, 2011, and January 31, 2011 (estimated), respectively. See exhibit II-2 in US Department of Housing and Urban Development, Actuarial Review of the Federal Housing Administration Mutual Mortgage Insurance Fund Forward Loans for Fiscal Year 2011 (excludes HECM) (Washington, DC: Author, October 12, 2011), 14; and Monthly Report to the FHA Commissioner, December 2011, http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/oe/rpts/com/commenu (accessed February 17, 2012). Outstanding balance of loans sixty-days-plus delinquent at January 31, 2012, and September 30, 2011, based on loan counts of 903,748 and 803,899, respectively, and an average loan balance for loans going to claim of $127,821.

Under the reserving practices of private mortgage insurers, both claim rates and loss percentages on delinquent loans would be calculated based on recent experience. In preparing table 1, the reserving practice of a private mortgage insurer (PMI), Genworth Mortgage Insurance Company was analyzed.[4] Genworth’s reserves as a percentage of risk-in-force was 58 percent. (Note: In Issue 1, a slightly different method of computing this metric was used).

Said another way, Genworth assumed that 58 percent of its known sixty-days-plus delinquent loans would ultimately result in a paid claim. As of the end of January 2012, the FHA had 903,748 delinquent sixty-days-plus loans, along with an average gross paid claim of $127,821[5] and a loss rate for termination year 2009 of 63.67 percent.[6] This results in an average loss per claim of $81,384 ($127,821 x 63.67 percent).

The FHA does not make available sufficient data to determine on the basis of these numbers what its reserves should be. However, based on Genworth’s practice, an insurance book with FHA’s paid claims experience and more than 903,000 loans that are sixty or more days past due should have an estimated loss reserve of about $42.66 billion.

Loan loss reserve calculation: 903,748 delinquent sixty-days-plus loans x 58 percent of delinquent loans resulting in a paid claim x $81,384 net paid claim = $42.66 billion.

Estimated net worth as of January 31, 2012. The FHA is estimated to have a current net worth of –$15.34 billion, approximately $16.5 billion less than the “economic net worth” set forth in FHA’s 2011 Actuarial Study.[7]

Estimated total capital shortfall under the 2 percent capital requirement as of January 31, 2012. The FHA would need a total capital infusion of $33.96 billion consisting of:

  1. $15.34 billion in addition to its current estimated capital resources of $27.32 billion ($28.18 billion – $0.86 billion) to fund an estimated loss reserve of $42.66 billion; and
  2. $18.61 billion to meet its statutory capital requirement of 2 percent. 


Estimated total capital shortfall under the 4 percent capital requirement as of January 31, 2012. The FHA would need a total capital infusion of $52.57 billion consisting of:

  1. $15.34 billion in addition to its current estimated capital resources of $27.32 billion ($28.18 billion – $0.86 billion) to fund an estimated loss reserve of $42.66 billion; and
  2. $37.22 billion to meet a PMI statutory capital requirement of 4 percent. 

 

Spotlight on Delinquency
Total Delinquency Rate in January Eases to 17.53 Percent; Serious Delinquency Rate Increases to 9.92 Percent

The FHA’s serious delinquency situation continues to deteriorate while the rest of the industry is experiencing declining levels. Lender Processing Services reports the serious delinquency rate for all loan types (including FHA loans) declined from 7.86 percent in April 2011 to 7.67 percent in December 2011. During the same period, the FHA’s serious delinquency rate ballooned from 8.2 percent to 9.73 percent.[8] 

As set out in table 2, the increases in the sixty-days-plus category are driving multibillion-dollar increases in the FHA’s estimated loss reserve, calculated under PMI accounting rules.

Table 2. National Delinquency Watch



End Date
Thirty-Day
Delinquency Rate
and Number
of Loans
Thirty Day-Plus Delinquency Rate
and Number
of Loans
Sixty Day-Plus Delinquency Rate
and Number
of Loans


Serious Delinquency



Total Loans
Jan. 2012 5.72% / 421,404 17.79% / 1,311,006 12.07% / 889,602 9.73% / 716,786 7,370,426
Dec. 2011 5.72% / 421,404 17.79% / 1,311,006 12.07% / 889,602 9.73% / 716,786 7,370,426
Nov. 2011 5.61% / 411.663 17.42% / 1,277,321 11.81% / 865,658 9.46% / 693,314 7,331,525
Oct. 2011 5.55% / 404,773 17.02% / 1,241,562 11.47% / 836,789 9.05% / 660,499 7,296,639
Sept. 2011 5.70% / 413,834 16.78% / 1,217,733 11.08% / 803,899 8.77% / 636,778 7,258,328
June 2011 5.79% / 411,258 16.62% / 1,160,462 10.55% / 749,204 8.34% / 592,366 7,103,531
Apr. 2011 N/A  N/A  N/A 8.2% / 575,950 7,035,016
Jan. 2011 N/A  N/A  N/A 8.9% / 612,443 6,882,984
Sources: US Department of Housing and Urban Development, "Neighborhood Watch," https://entp.hud.gov/sfnw/public (Servicing download, Excel; accessed February 18, 2012) and US Department of Housing and Urban Development, "FHA Outlook,".http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/oe/rpts/ooe/olmenu (accessed February 5, 2012). Rates are not seasonally adjusted.

 

Spotlight on the Impact of Unsustainable Lending Practices on Families and Neighborhoods
About 25 Percent of FHA’s Recently Insured Loans Have Layered Risks Resulting in a 15 Percent or Higher Expected Claim Rate

FHA considers its 2009–2011 books to be the so-called “good books of business,” yet its 2011 Actuarial Study projects that, even under rosy house price scenarios, these books will experience an average cumulative claim rate of 8.5 per 100 loans.[9]

However, averages can be deceiving. The worst-performing 25 percent of these loans consists of loans with layered risks such as slowly amortizing thirty-year loan terms combined with FICO credit scores less than 660. Most of these loans also have additional layers of risk, such as total high debt ratios (> 40 percent) and low down payments (< 5 percent).

Table 3. Serious Delinquency and Projected Claim Rates for the FHA's 2009 Unsustainable Lending
FICO Serious Delinquency 1 Expected Claim Rate
  580–599 21.18% 29
  600–619 17.15% 23
  620–659 11.18% 15
  660–679 6.58% 9
680–720 4.20% 6
  >720 1.92% 3
Source: Derived from the FHA's claim rate projection for 2009 contained in the FHA's 2011 Actuarial Study and data tabulations on FHA's seriously delinquent loans provided upon request by Genworth Financial.
Note: 1. Includes loans that have gone to claim.

 

The FHA’s risk layering impacts even borrowers with excellent credit. This is demonstrated by comparing two books of business with similar to FICO’s. Fannie Mae’s entire 2009 book of loans has a serious delinquency rate of 0.45 percent compared with the FHA’s rate of 1.92 percent on its loans with FICO scores greater than 720.
 
The FHA is projecting that by 2015, over 40 percent of its loans will have a FICO below 660, with most having additional high risk characteristics such as thirty-year amortization, low down payment, and presumably high debt ratios.[10] The US Department of Housing and Urban Development (HUD) has already taken steps to implement this policy initiative.[11]

According to National Mortgage News, Capital One Financial Corporation recently agreed to originate loans to borrowers with FICO scores of 580.[12] As noted in table 3, FHA loans with a FICO of 580–599 have an estimated claim expectancy of approximately 30 percent.

HUD should follow its own admonition:

“Given FHA’s mission, allowing the continuation of practices that result in . . . a high proportion of families losing their homes represents a disservice to American families and communities.”[13]

The FHA must be held accountable to the same standard HUD Secretary Shaun Donovan applies to the private sector. At the recent announcement of the “robo” signing settlement, Donovan said banks had wronged families and neighborhoods with “the origination and securitization of these horrendous products.”[14] 

Secretary Donovan should add to the proposed FHA Homeowner Bill of Rights a pledge not to insure a loan where a borrower is exposed to claim rates in excess of 15, 20, or even 30 percent.

 

Spotlight on Delinquency Hot Spots
Georgia and New Jersey Continue to Top the List of States with the Highest FHA Total Delinquency Rates

Last month, FHA Watch reported that one in four FHA loans outstanding in Georgia and New Jersey were thirty-days-plus delinquent as of December. The January rates for Georgia and New Jersey are 25.64 percent (down slightly from 25.78 percent in December 2010) and 24.59 percent (down slightly from 24.68 percent in December 2010), respectively.[15] A top-ten state update will appear in the April issue.

A Closer Look at Georgia. FHA insures about 18 percent of all mortgages (by count) outstanding in Georgia.[16] As of January 2012, Georgia had 87,218 delinquent FHA loans, representing about one-third of all the state’s delinquent loans. To put this in perspective, the Mortgage Bankers Association reports[17] that Georgia suffers from far more seriously delinquent FHA loans (48,866) than seriously delinquent self-denominated subprime loans (30,672)—and the gap is growing.

The Atlanta metropolitan statistical area has been the weakest housing market in the last year (price drop of 11.8 percent) and second weakest in the last ten years (an overall price drop of 11 percent). Over the past year the lowest house price tier dropped by 28 percent.[18]

 

Spotlight on the Road to FHA Program Reform
Principles to Guide FHA Reform to Achieve Sustainable Homeownership Consistent with FHA’s Low- and Moderate-Income Mission

In this issue, FHA Watch will spotlight policy changes needed to implement program reform principle 1:

  1. Step back from markets that can be served by the private sector by taking steps to return to a traditional 10 percent home purchase market share.
  2. Stop knowingly lending to people who cannot afford to repay their loans.
  3. Help homeowners establish meaningful equity in their homes.
  4. Concentrate on homebuyers who truly need help purchasing their first home.


To better understand the distortions caused by the FHA, one must start with an examination of the extent to which all of the government’s mortgage guaranty programs have distorted the home finance market. Today, government issued securities and guarantees account for more than 90 percent of all loan originations. As a result, we now have a mortgage market more appropriately called Government Mortgage (GM). GM consists of five divisions: Fannie, Freddie, FHA, Veterans Affairs (VA), and US Department of Agriculture (USDA). In 2010 the FHA, the VA and the USDA accounted for 55 percent of all owner-occupied home purchase loans.[19] The high preponderance of loans guaranteed by the FHA, the VA and the USDA have either no down payment or a minimal one.

To fully comprehend the increasing grip GM has on the massive $10 trillion housing finance market, we must recognize that these three divisions—the FHA, the VA, and the USDA— also benefit from a Ginnie Mae mortgage-backed securities (MBS) guarantee.[20],[21]  While in table 4, Ginnie is listed separately to show its unique advantages, FHA Watch will identify GM’s five divisions as Fannie, Freddie, Ginnie/FHA, Ginnie/VA, and Ginnie/USDA.

Table 4. Government Mortgage Advantages
  Advantages Fannie Freddie Ginnie FHA VA USDA
  Explicit guarantee No No Yes Yes Yes Yes
  Implicit guarantee Yes Yes N/A N/A N/A N/A
  Free guarantee Yes Yes Yes Yes Yes Yes
  Capital requirement below private sector Yes Yes Yes Yes Yes Yes
  0% risked base capital No No Yes N/A N/A N/A
  20% risked base capital1 Yes Yes N/A N/A N/A N/A
  Other investor advantages2 Yes Yes Yes Yes Yes Yes
  Absence of profit motive No No Yes Yes Yes Yes
  Tax exempt Yes3 Yes3 Yes Yes Yes Yes
  Administrative costs covered No No No Yes Yes Yes
  Exempt from qualified residential mortgage (QRM) Yes Yes Yes Yes Yes Yes
Notes: 1. Larger US banks use firm-specific risk models that reduced the 20 percent risk weight for government-sponsored enterprise (GSE) agency securities to an amount closer to Ginnie's 0 percent risk weight.
2. Investment advantages such as higher or no limit on quantity of investment and ability to use to meet liquidity requirements. Currently, Ginnie MBS get full credit for liquidity purposes versus GSE mortgage-backed securities qualifying for an 85 percent credit with a further limit to 40 percent of total liquid assets.
3. Because of Fannie and Freddie's massive losses, they are effectively tax exempt.

 

Most of the advantages listed in table 4 have been distorting the mortgage market for decades; however, the amount and size of the distortions have increased significantly since the collapse of the housing market in 2006–07. Higher loans limits and Ginnie’s growing pricing advantage over Fannie and Freddie have also greatly advantaged the FHA. Its unprecedented pricing power is allowing it to substantially raise premiums while keeping its market share high.

The FHA operates in tandem with Ginnie Mae. Ginnie MBS backed by FHA loans[22] sell at a substantial premium to Fannie (1.5 points in price) and Freddie (1.75 points in price). 

Sometimes laws passed ten, twenty, or even thirty years ago have unintended consequences as GM’s advantages change or grow over time. 

For example, the Homeowner Protection Act of 1998 requires that borrower-paid mortgage insurance premiums must be canceled once a loan’s original or amortized is equal to or less than 78 percent. Table 5 presents three 78 percent loan-to-value (LTV) examples where Ginnie/FHA is the best execution because of the combination of the 78 percent cancelation rule and the growing Ginnie MBS pricing advantage over Fannie.
 
The best way to measure the value of these advantages is to compare best pricing execution for loans with characteristics as set forth in table 5. In all cases but one, the Ginnie/FHA execution is better than Fannie’s. Because of all the privileges accorded the various GM divisions, any private execution would be one to three points lower than the Fannie execution.

Table 5. Best Price Execution (in red)
Feature Loan A Loan B Loan C Loan D Loan E Loan FLoan GLoan H
  MBS Coupon 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.0%
  Term 30-year 30-year 30-year 30-year 30-year 30-year 30-year 15-year
  LTV 96.5% 96.5% 95% 90% 90% 78% 78% 78%
  FICO 620 680 700 700 740 720 740 740
  Ginnie/FHA Execution 98.82 98.59 98.82 98.82 98.82 104.22 104.22 104.94
  Fannie Execution 94.24 96.78 97.66 99.10 100.44 102.39 102.64 103.31
  Advantage on a
  $150,000 loan
Ginnie/
FHA
$6,863
Ginnie/
FHA
$2,719
Ginnie/
FHA
$1,733
Fannie
$427
Fannie
$2,430
Ginnie/
FHA
$2,738
Ginnie/
FHA
$2,363
Ginnie/
FHA
$2,447
Source: Adapted from J.P. Morgan's 2012 Securitized Products Outlook, 18. MBS pricing from MBS Live published by Mortgage News Daily.
Note: Based on actual MBS pricing as of February 16, 2012. For example, on that date a Ginnie thirty-year MBS with a coupon of 3.5 percent had a price of 105.22 and a Fannie thirty-year MBS with the same 3.5 percent coupon had a price of 103.59. These prices were then adjusted for applicable borrower paid credit fees and mortgage insurance (MI) premiums and assumes the FHA's annual mortgage insurance premium and Fannie's guarantee fee increases by 10 basis points on April 1. 2012.

 

Table 5 demonstrates the extensive pricing advantages accruing to the Ginnie/FHA division, when compared to Fannie division. Fannie and Freddie are generally acknowledge to be underpriced relative to private-sector pricing. Table 5 also provides ample evidence that GM is incapable of rationally pricing risk.

  • Loan A is extremely high-risk, with an expected claim rate of at least 20 percent when insured by the FHA division. Yet because of the Ginnie/FHA division’s advantages, it is priced more than 4.5 points above a Fannie execution, or $6,863 on a $150,000 loan.
  • Loans B and C are within the market well served by the private MI sector, yet the Ginnie/FHA division provides additional subsidies on a $150,000 loan of $2,719 on Loan B and $1,733 on Loan C. The Ginnie/FHA division is providing subsidies where they are not needed.
  • Loan D would be a low-risk private MI loan, yet the Ginnie/FHA execution on a $150,000 loan is only $500 below the Fannie/private MI execution. Because of the looser lending standards of Ginnie/FHA, such as higher total debt ratios and seller concessions, even on these loans, private MI is substantially crowded out by Ginnie/FHA. 
  • Loans F, G, and H are clearly low-risk loans having a substantial down payment (22 percent) and good (720) to excellent (740) FICO scores, yet the Ginnie/FHA execution provides a 1.5 to 2 point price advantage over the Fannie execution amounting to thousands of dollars on a $150,000 mortgage. Once again, the Ginnie/FHA division is providing subsidies where they are not needed.
  • Only on Loan E, with a 10 percent down payment and a 740 FICO score, does private mortgage insurance combined with a Fannie execution have a substantially better execution than Ginnie/FHA. Yet even this can be overcome on occasion by Ginnie/FHA’s looser underwriting standards.

These examples help explain why the Ginnie/FHA, Ginnie/VA, and Ginnie/USDA divisions continue to maintain their market share at 80 percent, double their combined share in 2002–04.

Figure 1. Government Mortgage Insurance (FHA, VA, and USDA) Share of Traditional Mortgage Insurance Market (Based on Dollars)

Sources: Inside Mortgage Finance, Issue 2012:06, February 10, 2010; and USDA, Rural Development Progress Report, 2009 (36) and 2011 (32). USDA annual volume based on fiscal year volume and includes Section 502 direct lending program. Volume for 2011 estimated based on FY 2010 volume.

Exactly how is it that the Ginnie/FHA, Ginnie/VA, and Ginnie/USDA divisions have been able to maintain their 80 percent share for three years, notwithstanding purported efforts to reduce it? One must look at loan pricing dynamics to provide the answer:

  • In mid-2008 the present value of FHA and private MI premiums on a 95 percent LTV loan with a 700 FICO were similar at 3.75 points and 3.51 points[23] respectively.[24] 
  • Since then the FHA has raised its premium by 59 percent resulting in a present value of 5.95 points while the private MI premium increased by 27 percent, resulting in present value of 4.46 points.  
    • With such a large pricing advantage favorable to private MI, one would think the private sector would easily be able to compete with the FHA for the half of the FHA loans above a 700 FICO, yet the best execution for Loan D illustrates that this is not the case.  
  • To explain this anomaly one must also examine the impact of simultaneous changes that have occurred within other parts of the Ginnie/FHA division and other GM divisions.  
    • Ginnie’s MBS pricing advantage over a Fannie MBS has increased by 1.36 points since late-2010, more than of setting the private MI advantage resulting from the FHA’s premium increases. 
    • Since mid-2008 Fannie has raised its applicable Loan Level Pricing Adjustment from zero to 1 point, raising the cost of the private MI execution through Fannie.
  • Thus a nominal 1.25 point private mortgage insurance premium pricing advantage over FHA’s premium structure has been more than wiped out by this cumulative 2.36 point shift. This explains the 1-plus point Ginnie/FHA pricing advantage versus the Fannie/private MI execution for Loan C (95 percent LTV with a 700 FICO) shown in table 5.

 

This outcome is a result of having five GM divisions competing with each other for many of the same loans.[25] Since each has a complex set of government bestowed privileges, pricing structures, and cross-subsidies, we get only one predictable result: the continued dominance of the home finance market by Government Mortgage.

With respect to the Ginnie/FHA division, Congress has transferred to it large swaths of the home finance market that do not need government subsidies, with the latest transfer occurring this past November when FHA’s already extraordinarily high mortgage limits were needlessly increased. The result is a private MI industry that is crowded out, notwithstanding having raised about $10 billion of private capital since late 2008.  

Unless the FHA and Ginnie step back from markets that can be served by the private sector and narrowly target their substantial subsidies to meet a narrowly defined affordable housing mission, the Ginnie/FHA division will continue to:

  • Crowd out private-sector lending;
  • Foster unfair and potentially dangerous competition;
  • Foster political interference;
  • Mute pricing signals;
  • Distort capital flows; and
  • Expose taxpayers to growing liabilities associated with the guarantees undertaken by GM’s five divisions. 

 

Until policies are implemented which force FHA and Ginnie to narrowly target their subsidies so as to step back from markets that could be served by the private sector, Congress should levy government subsidy reduction fees in order to offset the subsidies flowing to borrowers who could be served by the private sector. See table 6.

 

Spotlight on the Road to FHA Reform
Policy Changes Needed to Implement Program Reform Principle 1 

In this issue, FHA Watch will spotlight policy changes needed to implement fiscal reform principle 1:

  1. Utilize generally accepted accounting principles, and set rigorous disclosure standards.
  2. Establish and maintain loan loss and unearned premium reserves.
  3. Establish and maintain a minimum capital requirement of 4 percent of amortized risk in force.
  4. Fund a countercyclical premium reserve.

As FHA Watch has documented (see issue 1), FHA is a seriously troubled and deeply insolvent government agency in need of fundamental reform. Its capital shortfall of tens of billions of dollars and one-thousand-to-one leverage mean that if it were a private firm, state regulators would immediately shut it down. This first reform principle would start the process of fiscal reform by applying private-sector safety and soundness and disclosure principles to the FHA. This should include:

  1. Applying generally accepted accounting standards applicable for private mortgage insurers to quarterly examinations of the FHA’s financial condition.
  2. Applying US Securities and Exchange Commission disclosure standards to information disclosed regarding the FHA’s insurance programs and funds. The significant downward adjustments that HUD has had to make in the FHA financial disclosures in the three months since its November 2011 Annual Report to Congress demonstrate the need for this reform. If the FHA were a private company, the SEC would have grounds to launch an investigation into its inadequate and misleading disclosures based on rosy scenarios. 
  3. Requiring the US Treasury to retain an independent third party to conduct a safety and soundness review to determine the FHA’s current fiscal condition under applicable generally accepted standards and report within sixty days.
  4. Requiring the FHA to establish an emergency capital plan with biweekly updates to Congress.
  5. Hold oversight hearings to determine the FHA’s current and ongoing fiscal condition based on emergency capital plan reports.

 

The Road Map to FHA Reform
Specific Steps for Reform and the Status of Each

Each month, the Road Map to FHA Reform will chronicle the specific steps needed to reform the FHA in a manner consistent with the principles outlined in FHA Watch and will track their status toward eventual implementation.

Table 6. Road Map to Program Reform


Suggested Reforms to Implement Principle 1
Status (green denotes progress toward adoption, red denotes a step backward)
Set loan limits equal to an area's current median price.


In November 2011, Congress set higher limits.

Serve first-time homebuyers with incomes below the area median. No action

Serve repeat homebuyers below low and moderate income levels (< 80 percent of area median).

No action
Limit lending to sustainable loans designed to achieve the FHA's mission to help low- and moderate-income homebuyers. No action

Until the above are implemented, levy a 0.25 percent, 0.50 percent, and 0.75 percent per year government subsidy reduction fee on any Ginnie/FHA or Ginnie/USDA insured loan with an initial LTV of >90 percent and <=95 percent, with an initial LTV of >80 percent and <=90 percent and with an initial LTV of <=80 percent, respectively. Revenue would be paid directly to the Treasury and not benefit Ginnie, the FHA, or the USDA. No action





 

Table 7. Road Map to Fiscal Reform

Suggested Reforms to Implement Principle 1
Status (green denotes progress toward adoption, red denotes a step backward)
Require application of generally accepted accounting standards applicable for private mortgage insurers to quarterly examinations of the FHA's financial condition.
No action


Require application of US Securities and Exchange Commission disclosure standards to information disclosed regarding the FHA's insurance programs and funds.


Contained in Rep. Scott Garrett's amendment to Rep. Judy Biggert's FHA Emergency Solvency Act of 2012 approved by the Insurance, Housing and Community Opportunity Subcommittee of the House Financial Services Committee on February 7, 2012.
Require the US Treasury to retain an independent third party to conduct a safety and soundness review to determine the FHA's current fiscal condition under applicable generally accepted standards and report within sixty days.

Contained in Garrett amendment to Biggert bill. Subcommittee approval on February 7, 2012.
Require the FHA to establish an emergency capital plan with biweekly updates to Congress. Contained in Garrett amendment to Biggert bill. Subcommittee approval on February 7, 2012.
Hold oversight hearings to determine the FHA's current and ongoing fiscal condition based on emergency capital plan reports. No action


 

Notes

1. By statute, the FHA is required to maintain a capital level of 2 percent. Private mortgage insurers are required to maintain a capital level of 4 percent.
2. Based on recent press reports, the FHA’s forward single-family Mutual Mortgage Insurance Fund (MMIF) is expected to receive approximately $600 million from two settlements with lenders.
3. Nick Timiraos, “Housing Agency’s Reserves at Risk,” Wall Street Journal, February 13, 2012, http://online.wsj.com/article/SB10001424052970204795304577221222265037002.html (accessed February 19, 2012).
4. Genworth, Quarterly Financial Supplements, Delinquency Metrics-US Mortgage Insurance Segment, http://phx.corporate-ir.net/phoenix.zhtml?c=175970&p=irol-quarterlyreports (accessed February 8, 2012).
5. Derived from table 7 in US Department of Housing and Urban Development, FHA Single-Family Mutual Mortgage Insurance Fund Programs, Quarterly Report to Congress FY 2011 Q4 (Washington, DC: Author, January 31, 2012).
6. Latest termination year loss rate available and found at exhibit E-1 in US Department of Housing and Urban Development, Actuarial Review of the Federal Housing Administration Mutual Mortgage Insurance Fund Forward Loans for Fiscal Year 2011 (excludes HECM) (Washington, DC: Author, October 12, 2011), E-2.
7. Ibid.
8. LPS Applied Analytics, “Mortgage Monitor,” n.d., www.lpsvcs.com/LPSCorporateInformation/CommunicationCenter/PressResources/Pages/MortgageMonitor.aspx (accessed February 18, 2012).
9. US Department of Housing and Urban Development, Actuarial Review of the Federal Housing Administration.
10. US Department of Housing and Urban Development, Actuarial Review of the Federal Housing Administration, Appendix C-4.
11. Brian Collins, “FHA Wants Lenders to Relax Credit Scores,” National Mortgage News, January 12, 2012, www.nationalmortgagenews.com/nmn_features/fha-relax-credit-scores-1028259-1.html (accessed January 23, 2012).
12. Kate Berry, “Capital One Hopes to Get on Track with Low FICO Score FHA Loans,” National Mortgage News, February 17, 2012, www.nationalmortgagenews.com/dailybriefing/2010_540/capital-one-low-fico-fha-loans-1028938-1.html (accessed February 21, 2012).
13. US Housing and Urban Development Department, “Federal Housing Administration Risk Management Initiatives: Reduction of Seller Concessions and New Loan-to-Value and Credit Score Requirements” (notice of proposed rulemaking), July 15, 2010, www.federalregister.gov/articles/2010/07/15/2010-17326/federal-housing-administration-risk-management-initiatives-reduction-of-seller-concessions-and-new#p-31 (accessed January 18, 2012).
14. Hugh Son and Dawn Kopecki, “Banks Not off Hook with $25B Mortgage Deal,” Bloomberg, February 9, 2012, www.bloomberg.com/news/2012-02-09/u-s-banks-face-more-costs-after-25-billion-mortgage-foreclosure-accord.html (accessed February 17, 2012).
15. US Department of Housing and Urban Development, “Neighborhood Watch,” https://entp.hud.gov/sfnw/public (Servicing download, Excel; accessed February 18, 2012). Rates are not seasonally adjusted.
16. Derived from Mortgage Bankers Association, National Delinquency Survey (Q2 2011 and Q4 2011), February 16, 2012, www.mbaa.org/researchandforecasts/productsandsurveys/nationaldelinquencysurvey.htm (accessed February 21, 2012).
17. Ibid.
18. Motoko Rich, “In Atlanta, Housing Woes Reflect Nation’s Pain,” New York Times, February 1, 2012.
19. Mortgage Bankers Association, “2004-2010 HMDA Home Purchase Owner-Occupied by Borrower Race,” January 13, 2012 (draft).
20. For purposes of simplicity, the twelve Federal Home Loan Banks are omitted from this analysis.
21. For example, FHA insures 100 percent of any eventual loss of principal and interest. Ginnie Mae guarantees the timely payment of principal and interest. 
22. Nearly all FHA loans are pooled into Ginnie MBS.
23. Based on Genworth Mortgage Insurance pricing.
24. Premium for a thirty-year 95 percent loan with a 700 FICO, FHA’s current median.
25. In the 1990s the Congress and HUD set up a similar competition among Fannie/Freddie, the FHA, banks subject to the Community Investment Act, mortgage bankers participating in HUD’s Best Execution initiative, and self-denominated subprime lenders. This competition set off a race to the bottom that caused massive damage to the housing market and the economy. See Edward J. Pinto, Government Housing Policies in the Lead-Up to the Financial Crisis: A Forensic Study, February 5, 2011, www.aei.org/papers/economics/financial-services/housing-finance/government-housing-policies-in-the-lead-up-to-the-financial-crisis-a-forensic-study/.

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