FHA Watch, January 2012

FHA Watch, a new monthly online publication, will focus on the government’s 100 percent taxpayer-backed Federal Housing Administration (FHA) mortgage guarantee program and the risks it poses for taxpayers, families, and communities. 

The FHA continues to expand and crowd out the private sector. It is guaranteeing more high-risk loans than low-risk ones, has close to one million mortgages in its foreclosure pipeline, and is permitted to project its financial health using accounting rules based on rosy projections extending decades into the future, all the while ignoring that it is already insolvent and needs a bailout to the tune of tens of billions of dollars by any reasonable accounting standard.

Each month, FHA Watch will spotlight the FHA’s financial condition and delinquency levels and call attention to the impact of unsustainable lending practices on families and neighborhoods. Check out the Denial Dial, with figures updated each month, for a quick visual of the FHA’s capital position. FHA Watch will spotlight much-needed FHA reforms, laying out specific suggestions designed to protect taxpayers, families, and neighborhoods.

 

Spotlight on Insolvency

The FHA Is Estimated to Have a Current Net Worth of –$17 Billion and an Estimated Capital Shortfall of $35–53 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 FHA’s delinquent loans, risk exposure, capital resources, and an applicable capital requirement of either 2 percent or 4 percent.[1] 

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).[2]

Table 1. Insolvency Watch



Date
FHA's "Capital Resources" (Assets)
Cash Flow since Sept. 30, 2011
Estimated Loss Reserve (Liabilities on PMI Basis)
Current Net Worth (PMI Basis)


Required Capital Ratio
Required Capital Under Applicable Ratio1
Current
Shortfall
(PMI Basis)
Sept. 30, 2011 $28.18 $40.18 –$12.00 2% $17.95 –$29.95
Sept. 30, 2011 $28.18 — $40.18 –$12.00 4% $35.90 –$47.90
Dec. 31, 2011 $28.18 –$0.6482 $44.455 –$16.923 2% $17.99 –$34.91
Dec. 31, 2011 $28.18 –$0.648 $44.455 –$16.923 4% $35.98 –$52.90
Notes: 1. Total based on the FHA's total amortized risk in force net of loans covered by loan loss reserve of $898.5 billion ($1.009 trillion − $110.5 billion) and $901 billion ($1.020 trillion − $120.4 billion) as of September 30, 2011, and November 30, 2011, 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 US Department of Housing and Urban Development, FHA Single-Family Outlook, November 2011, http://portal.hud.gov/hudportal/documents/ huddoc?id=ol_current.pdf (accessed January 12, 2012) Outstanding balance of loans sixty-days-plus delinquent at December 31, 2011, and September 30, 2011, based on loan counts of 889,602 and 803,899, respectively, and an average loan balance of $126,574.
2. 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.

 

Estimated net worth as of December 31, 2011. FHA is estimated to have a current net worth of -$16.923 billion, approximately $18 billion less than the “economic net worth” set forth in FHA’s 2011 Actuarial Study.[3]

Estimated total capital shortfall under the 2 percent capital requirement as of December 31, 2011. The FHA would need a total capital infusion of $34.91 billion consisting of:
1.    $16.92 billion in addition to its current estimated capital resources of $27.53 billion ($28.18 billion – $0.65 billion) to fund an estimated loss reserve of $44.46 billion; and
2.    $17.99 billion to meet its statutory capital requirement of 2 percent. 

Estimated total capital shortfall under the 4 percent capital requirement as of December 31, 2011. The FHA would need a total capital infusion of $52.90 billion consisting of:
1.    $16.92 billion in addition to its current estimated capital resources of $27.53 billion ($28.18 billion – $0.65 billion) to fund an estimated loss reserve of $44.46 billion; and
2.    $35.98 billion to meet a PMI statutory capital requirement of 4 percent.

 

Spotlight on Delinquency

Total Delinquency Rate in December Hit 17.79 Percent

The FHA’s thirty-day-plus delinquency rate continued its upward climb in December, increasing to 17.79 percent, or approaching one in five loans outstanding.

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
  December 2011 5.72%/421,404 17.79%/1,311,006 12.07%/889,602 9.73%/716,786 7,370,426
  November 2011 5.61%/411.663 17.42%/1,277,321 11.81%/865,658 9.46%/693,314 7,331,525
  October 2011 5.55%/404,773 17.02%/1,241,562 11.47%/836,789 9.05%/660,499 7,296,639
  September 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
Source: US Department of Housing and Urban Development, "Neighborhood Watch," https://entp.hud.gov/sfnw/public (Servicing download, Excel; accessed January 12, 2012).

 

The FHA’s thirty-days-plus delinquency rate increased from 16.62 percent in June to 17.79 percent in December. Over the same period, the delinquent loan total has increased by 151,000, with most of the increase occurring in the serious delinquency category.  

Lender Processing Services reports the serious delinquency rate for all loan types actually declined slightly from June 2011 (7.75 percent) to November 2011 (7.72 percent). During the same period, the FHA’s serious delinquency rate soared from 8.34 percent to 9.46 percent.[4]

As set out in table 1 above, 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.

 

Spotlight on Delinquency Hot Spots

Georgia and New Jersey Top the List of Ten States with the Highest FHA Total Delinquency Rates

One in four FHA loans outstanding in Georgia and New Jersey are now thirty-days-plus delinquent, with eight additional states having delinquency rates above 20 percent. The national rate is 17.79 percent.

Table 3. Delinquency Watch: Hot Spots by State, as of December 2011
State Thirty-Days-Plus Delinquency Rate Total Loans
  Georgia 25.79% 338,187
  New Jersey 24.67% 182,352
  Illinois 23.66% 261,223
  Florida 23.07% 396,696
  Mississippi 22.54% 66,686
  Michigan 21.92% 223,016
  Delaware 20.86% 26,769
  North Carolina 20.60% 225,717
  Alabama 20.30% 136,306
  Louisiana 20.23% 101,612
Source: US Department of Housing and Urban Development, "Neighborhood Watch," https://entp.hud.gov/sfnw/public (Servicing download, Excel; accessed January 12, 2012).

 

 

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

The FHA points out that it has tightened underwriting standards and notes an average FICO credit score of about 700 compared to 630 in 2007. Its 2009–2011 books are the so-called “good books of business,” yet its 2011 Actuarial Study projects that, even under rosy scenarios, these books will experience an average cumulative claim rate of 8.5 per 100 loans.[5] However, averages can be deceiving. The worst-performing 25 percent of these loans are thirty-year fixed-rate loans with FICO credit scores less than 660.

Most of these loans also have high debt ratios (> 40 percent) and/or high loan-to-value (LTV) ratios (> 90 percent); however, even those with lower LTV and debt ratios have unacceptably high expected claim rates.

These highest-risk loans will likely have a claim rate of
1.    15 percent or more under the rosy scenario used in FHA’s 2011 Actuarial Study, which assumes an average 4 percent annual price appreciation over 2012–2020.[6] 
2.    20 percent if home price increases average about 2 percent annually over the same period.
3.    25 percent expecting no house price appreciation.
4.    30 percent under economic stress.

At the same time, FHA is projecting that by 2015 over 40 percent of its loans will have these highest-risk characteristics.[7] HUD appears intent on putting this policy initiative in motion, as reported in the aptly headlined article "FHA Wants Lenders to Relax Credit Scores."[8]

Stop to consider what this means to both the homebuyers and the neighborhoods where these future claims will be located. This is the other side of the coin when a government agency lowers its underwriting standards so that more individuals or families can buy homes. The US Department of Housing and Urban Development (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.”[9]

The Dodd-Frank Act (Section 1411) sets minimum standards for residential mortgage loans (qualified mortgages) and imposes harsh penalties for violators. Its standards require “a reasonable and good faith determination” that “the consumer has a reasonable ability to repay the loan.” This determination needs to take into “consideration a consumer’s credit history, current income, expected income the consumer is reasonably assured of receiving, current obligations, debt-to-income ratio or the residual income the consumer will have after paying non-mortgage debt and mortgage-related obligations, employment status, and other financial resources other than the consumer’s equity in the dwelling or real property that secures repayment of the loan.”[10]

The FHA’s own underwriting standards result in expected and predictable claim rate of 15 percent or more for this highest-risk group of loans. If, as Dodd-Frank appears to mandate, the FHA did not rely on 4 percent annual home price growth for the next nine years, the claim rate would be likely 25 percent, or one in four loans. Claim rates of 15 percent with appreciation and 25 percent without would appear not only to be a clear violation of the qualified mortgage standards established by Dodd-Frank, but the return of Subprime 2.0.[11]

 

Spotlight on FHA Reform


Future issues of FHA Watch will look at reforming FHA programmatically according to the following principles:
1.    Step back from markets that can be served by the private sector.
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.

Future issues of FHA Watch will look at reforming FHA’s accounting and capital requirements according to the following principles:
1.    Utilize generally accepted accounting principles and quarterly disclosures meeting US Securities and Exchange Commission 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.

 

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. 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 practices of a private mortgage insurer (PMI), Genworth Mortgage Insurance Company were analyzed [Genworth, Third Quarter Financial Supplement, November 3, 2011, 47, http://phx.corporate-ir.net/phoenix.zhtml?c=175970&p=irol-quarterlyreports (accessed January 4, 2012)]. Genworth had reserved $28,800 for each loan delinquent sixty days or more past due and had an average net paid claim of $46,900. Thus, Genworth’s loss reserve per delinquent loan as a percentage of the average claim paid was 61.4 percent.  Said another way, Genworth assumed that 61.4 percent of its known sixty-days-plus delinquent loans would ultimately result in a paid claim. As of the end of December 2011, the FHA had 889,602 delinquent sixty-days-plus loans, along with an average gross paid claim of $128,574 and a net paid claim of $81,387 [derived from table C-D in US Department of Housing and Urban Development, FHA Single-Family Mutual Mortgage Insurance Fund Programs, Quarterly Report to Congress FY 2011 Q3 (Washington, DC: Author, September 30, 2011)]. 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, I estimated that an insurance book with FHA’s paid claims experience and more than 889,000 loans that are sixty or more days past due should have a loss reserve of about $44.45 billion. Loan loss reserve calculation: $81,387 net paid claim x 889,602 delinquent sixty-days-plus loans x 61.4 percent of delinquent loans resulting in a paid claim = $44.455 billion. 

3. 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).

4. LPS Applied Analytics, “Mortgage Monitor,” n.d.,  www.lpsvcs.com/LPSCorporateInformation/CommunicationCenter/PressResources/Pages/MortgageMonitor.aspx (accessed January 20, 2012).

5. US Department of Housing and Urban Development, Actuarial Review of the Federal Housing Administration.

6. US Department of Housing and Urban Development, Annual Report to Congress: Fiscal Year 2011 Financial Status, FHA Mutual Mortgage Insurance Fund (Washington, DC, November 15, 2011), derived from figures 15 (39) and 18 (49).

7. US Department of Housing and Urban Development, Actuarial Review of the Federal Housing Administration, Appendix C-4.

8. 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).

9. 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).

10. Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 11th Cong. (July 21, 2010).

11, Excerpt from Angelo Mozilo, “The American Dream of Homeownership: From Cliché to Mission” (John T. Dunlop Lecture sponsored by Harvard’s Joint Center for Housing Studies, Washington, DC, February 4, 2003): “From my point of view, if 80% of the sub-prime borrowers are managing to make ends meet and make the mortgage payments on time, then, shouldn’t we as a Nation, be justifiably proud that we are dramatically increasing homeownership opportunities for those who have been traditionally left behind.”

 

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