Why the National Association of Realtors ignores the reality of FHA's insolvency

The National Association of Realtors (NAR), which pushed Congress to give FHA yet more responsibilities, is now trying to show that the agency is not really insolvent. But the slippery "facts" they are using show how tenuous their argument is:

What NAR says:  "FHA's current cash reserves total $33.7 billion - a $400 million increase from a year ago.  These reserves are fully capitalized to pay 30 years' worth of expected claims and losses.  By comparison, the Financial Accounting Standards Board only requires private financial institutions to hold reserves for losses over the next 12 months.  FHA has 30 times that amount in their cash reserves, plus another $2.55 billion in the excess capital reserves.

"The FY11 actuarial review states that 'On net, the economic value of the Fund in future years has increased significantly due to the new, higher forecast of house price growth. ‘  It is anticipated that FHA will again reach the 2% excess reserve requirement by 2014."

What NAR does not say: As of December 31, 2011 FHA had more than 889,000 loans that were sixty or more days past due. The expected losses on these known delinquent loans are estimated to be over $40 billion or substantially more than FHA's cash reserves. If it were a private firm, state regulators would immediately shut it down. Even using its own rosy numbers puts FHA's leverage at one thousand to one, a far more scandalous ratio than Fannie Mae and Freddie Mac ever had. FHA's accounting allows it to create rosy scenarios about house prices that enable it to project high future returns on its insurance in force. This accounts for its claim to have some "capital."  But these lax accounting standards obscure real and present danger to its own bottom line and the American taxpayer. When measured against the accounting system used by private mortgage insurers, the FHA is likely deeply insolvent to the tune of $15-$20 billion, with a total capital shortfall of about $50 billion. 

What NAR says:  "FHA, like every other holder of mortgage risk, has incurred financial losses as a result of increasing foreclosures.  However, an analysis of FHA data indicates the problem is concentrated in older FHA loans that have been significantly affected by the 33% decline in house prices since 2006.  There has been widespread improvement in the performance of FHA loans since the market collapsed in 2008.  In fact, loans originated since 2009, which comprise about 75% of FHA's portfolio, have record low rates of serious delinquency.  Loans originated in 2010 & 2011 have the best performance in the 13 year history of the Neighborhood Watch data system with a seriously delinquent rate of 1.85%.  Loans originated in last two years now comprise only 7% of the seriously delinquent loans in FHA's portfolio."  

 What NAR does not say: The NAR cites FHA's 2009-2011 books as good books of business. Yet FHA's 2011 Actuarial Study, even while using rosy house price scenarios, projects that these books will experience an average cumulative claim rate of 8.5 per 100 loans.  Consider that conventional loans originated in 2009-2011 will likely have an average a loss rate of one per hundred.  Further, averages can be deceiving. The worst-performing 25 percent of FHA's 2009-2011 books consists of loans with layered risks such as slowly amortizing thirty-year terms combined with FICO credit scores of less than 660.  Most of these loans also have additional layers of risk such as total high debt ratios (> 40 percent) and/or low down payments (<5 percent).   On average borrowers in this group will be forced to endure claim rates of 15 or more. Today, combining its new and old portfolios of insurance in force, FHA is experiencing extremely high defaults and foreclosures. FHA's thirty-day-plus delinquency rate has been increasing dramatically.  At December 31, 2011 it was 17.79 percent, up from 16.62% in June 2011. While FHA's delinquency rate approaches one in five insured, the delinquency rate for the entire market is declining.  For example, Lender Processing Services reports the serious delinquency rate for all loan types (including FHA loans) actually declined from April 2011 (7.86 percent) to December 2011 (7.67 percent) while during the same period, FHA's serious delinquency rate soared from 8.2 percent to 9.46 percent.

What NAR says:  The FY11 Actuarial Review actually shows the opposite [that higher loan limit put the FHA at greater risk] to be true.  The review states, "FHA experience indicates that more expensive houses tend to perform better compared with smaller houses in the same geographical area, all else being equal."

 What NAR doesn't say:  Loans on homes costing one-half of a million dollars, three-quarters of a million dollars or more should experience default rates of less than one per hundred, yet when FHA insures these loans the risk rises to six or seven times this level. This is because most of these loans have multiple risk characteristics such a slowly amortizing thirty-year term combined with a low down payment (<5%), high total high debt ratios (> 40 percent), a value distorting seller concession, or a FICO score below 680.

 What NAR says:  "FHA was created in 1934 during a difficult time in housing finance markets.  It is now filling just the role it was designed for - to provide safe, affordable financing when the private market cannot or will not participate.   In 2010, FHA was used by 56 percent of all first-time homebuyers, and 60 percent of all African-American and Hispanic homebuyers.  In addition, 85% of borrowers obtaining homes at the higher loan limits had incomes below $150,000, and nearly 65% had incomes less than $100,000."

 What NAR doesn't say: This is not your great-grandfather's FHA. FHA started with 20 year loan terms and a maximum LTV of 80%.  During its first twenty year it insured 2.9 million mortgages. Over this twenty year period, FHA paid claims on 5,712 properties for a cumulative claims rate of 0.2 percent. Today FHA has about 7.4 million loans outstanding.  Just the 889,000 known delinquents noted above are expected to result in nearly 516,000 claims. At the same time FHA has strayed far from its mission to provide sustainable lending opportunities to low- and moderate- income and first-time homebuyers. For example, in 2011 FHA primarily financed higher priced homes with 54% of FHA's dollar volume going to finance homes that were greater than 125% of an area's median house price, up from 22% in 2009.   

What NAR says:  "FHA borrowers in FY 2011 have an average credit score above 700. This is the first time the average credit score for FHA borrowers broke the 700 mark.  FHA credit quality has improved steadily since 2007, 4th quarter.  Over 50% of FHA loans made in every quarter since 2009 (2nd quarter) had credit scores above 680. In 2006 and 2007, only about 20% of the FHA loans insured in 2006-2007 had credit scores above 680."

What NAR doesn't say:  As noted earlier, the worst-performing 25 percent of FHA's 2009-2011 books consists of loans with layered risks such as slowly amortizing thirty-year terms combined with FICO credit scores of less than 660.  Most of these loans also have additional layers of risk such as total high debt ratios (> 40 percent) and/or low down payments (<5 percent).   On average borrowers in this group will be forced to endure claim rates of 15 or more.

 To put help NAR's current comments in perspective, near the height of the housing and mortgage bubble in 2006, then NAR president Thomas Stevens was asked whether he was concerned about NAR's own survey finding that 43% of first-time home buyers put no money down.   He answered that he wasn't, but "if the number was higher than that, I'd be concerned." (USA Today, January 17, 2006). Today the NAR is once again not concerned about FHA's insolvency and growing delinquencies because it uses FHA to help its members sell more homes, regardless of the risk this poses to FHA and the taxpayers. 



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About the Author


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

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