FHA Watch, June 2012

Article Highlights

  • About 1.5 million recent FHA borrowers are underwater.

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  • FHA has lost $4 billion in net worth in FY 2012.

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  • Destructive FHA lending practices increase foreclosure risk for homeowners.

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Read Issue 5, May 2012.
Read Issue 4, April 2012.


This Issue's Highlight

FHA Watch, No. 6, June 2012

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FHA Is Responsible for 1.5 Million New Underwater Loans:
The Federal Reserve estimates that about one-third of the 11.1 million underwater home loans in the United States are insured by the Federal Housing Administration (FHA). These 3.6 million underwater FHA loans account for nearly half of the FHA’s 7.4 million outstanding loans. Since about 72 percent of all outstanding FHA loans date from 2009 or later, a reasonable estimate would be that about 1.5 million of recent FHA borrowers are underwater.

This comes as no surprise since the FHA continues to combine minimal down payments (average of 4 percent) with slowly amortizing thirty-year loan terms. As a result, earned homeowner equity (the combination of down payment and scheduled loan amortization) amounts to less than 10 percent after four years, or about enough to sell a home at the break-even point if home prices stay steady. However, prices have declined nationally about 7 percent since mid-2009, with lower-priced homes declining even more. When combined with borrowers’ low FICO scores and high debt-to-income (DTI) ratios, the result is a continuation of the FHA’s destructive lending—lending that has resulted in 20–25 percent of recent borrowers facing a 10 percent or greater likelihood of foreclosure.

This Month’s Features

Spotlight on Insolvency
FHA’s Position Worsened in May, with an Estimated Current Net Worth of –$22.11 Billion and a Capital Shortfall of $41–61 Billion

Spotlight on Delinquency
Total Delinquency Rate Increased in May to 16.23 Percent Because of Increase in Both Thirty- and Sixty-Day Delinquencies; Serious Delinquency Rate Ticked Up to 9.43 Percent

Spotlight on Underwater Loans
FHA Is Responsible for 1.5 Million New Underwater Loans

Spotlight on Best Price Execution
The Government Mortgage Complex’s Ginnie Brands Demonstrate Continued Pricing Dominance over Fannie Mae

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

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About the Author

 

Edward J.
Pinto
  • American Enterprise Institute (AEI) resident fellow Edward J. Pinto is the codirector of AEI’s International Center on Housing Risk. He is currently researching policy options for rebuilding the US housing finance sector and specializes in the effect of government housing policies on mortgages, foreclosures, and on the availability of affordable housing for working-class families. Pinto writes AEI’s monthly Housing Risk Watch, which has replaced AEI’s FHA Watch. Along with AEI resident scholar Stephen Oliner, Pinto is the creator and developer of the AEI Pinto-Oliner Mortgage Risk, Collateral Risk, and Capital Adequacy Indexes.


    An executive vice president and chief credit officer for Fannie Mae until the late 1980s, Pinto has done groundbreaking research on the role of federal housing policy in the 2008 mortgage and financial crisis. Pinto’s work on the Government Mortgage Complex includes seminal research papers submitted to the Financial Crisis Inquiry Commission: “Government Housing Policies in the Lead-up to the Financial Crisis” and “Triggers of the Financial Crisis.” In December 2012, he completed a study of 2.4 million Federal Housing Administration (FHA)–insured loans and found that FHA policies have resulted in a high proportion of working-class families losing their homes.

    Pinto has a J.D. from Indiana University Maurer School of Law and a B.A. from the University of Illinois at Urbana-Champaign.

  • Phone: 240-423-2848
    Email: edward.pinto@aei.org
  • Assistant Info

    Name: Emily Rapp
    Phone: 202-419-5212
    Email: emily.rapp@aei.org

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