FHA: Let Them Eat Cake

This article originally appeared on HousingStorm.com.

The FHA made bad loans, at the urging of Congress and The White House, to prop up home prices and, in their own words, saving us from depression.

The bailout will come. The bill will be enormous.

HUD and The FHA believe we should be THANKING them.

This is The FHA's "Let them eat cake" moment.

The losses are picking up steam.

The FHA's Capital Reserve Requirement has fallen to 0.53%, below the 2% minimum mandated by Congress.

Defiantly, The FHA stated: FHA is making program and management changes designed to bring capital reserves promptly back to the 2% level

Anyone believe that?

For perspective, one year ago, the Capital Reserves were at 3%...meaning the Reserves have fallen by more than 82% in the last 12 months. From the HUD pressroom:

The independent study shows that FHA has sustained significant losses from loans made before 2009, and the capital reserve ratio has fallen below the congressionally mandated threshold, but concludes that under most economic scenarios considered FHA’s reserves would remain above zero.

My thoughts: With lower overall prices and the removal of DAPs, loans from 2009 forward should perform a little better...but still not well. Under the most-likely economic scenario, reserves will crash below zero within the next couple of months. Notice how they are moving the target: 2% was the magic number and now they are trying to change to focus to zero.

FHA’s capital reserve ratio, which is determined through findings from the independent actuarial study, measures reserves held in excess of those needed to cover projected losses over the next 30 years. The review projects the capital reserve ratio to be 0.53 percent of total insurance in force this year, below the two-percent statutory threshold. This capital ratio fell from 3 percent in the fall of 2008, reflecting difficult conditions in the housing market. The 0.53 percent capital ratio (which represents the funds held in the Capital Reserve Account) is in addition to the auditor’s base case estimate of the 30-year reserves needed to pay for losses on existing loans (which are held in the Financing Account). Combining those two accounts, FHA holds $31 billion in its total reserves today, or more than 4.5 percent of total insurance-in-force.

After a record drop in the housing market, the FHA is now helping to facilitate the market’s recovery. The volume of FHA insurance guarantees has increased since 2008, as private sources of mortgage finance have retreated from the market. Nearly 80 percent of FHA’s purchase-loan borrowers in 2009 were first-time homebuyers. In the second quarter of 2009, nearly 50 percent of all first-time buyers in the entire housing market used FHA-insured loans. The new lending is being done as FHA has halted the seller-financed down payment assistance program, tightened underwriting standards on streamline refinances, increased oversight of lenders, and is considering additional prudent measures. The quality of new loans insured by FHA has improved on several metrics including average borrower credit score; the average borrower FICO score today is 693 compared to 633 two years ago. Additionally, FHA insured more than 835,000 refinances in FY 2009 to lower interest rate loans, enabling borrowers to save an estimated total annual savings of $1.3 billion.

“FHA is playing a critical role in restoring health to the housing market by helping working families access mortgage finance when private capital is tight,” said Secretary Donovan. “This is a temporary role which FHA has played in previous economic downturns. The Administration is committed to ensuring that the FHA steps back as private capital returns to the market. With this temporary increased role comes increased risk and responsibility. That’s why we are committed to closely monitoring market behavior patterns and economic risks so that we are prepared to enact reforms that ensure the FHA’s financial health moving forward.”

My Thoughts: it's time to remind ourselves...What is The FHA’s Mission?

... As part of its efforts to manage risk, FHA is modeling more extreme scenarios than those used by the actuary, including scenarios showing the reserves going below zero. FHA is committed not only to understanding its risks, but also to developing policy responses appropriate to addressing that risk.

The FHA is attempting to make the case that the worst is behind them, they're making necessary reforms, and loan performance in the future shouldn't get too much worse. Consider this from Calculated Risk:

Overall 17.71% of FHA insured loans are delinquent, and 8.52% seriously delinquent. Note: Seriously delinquent "Includes all loans 90-days past due plus all in-bankruptcy and in-foreclosure cases."

The 2009 vintage is just getting started, but the FHA has tightened standards (higher FICO scores), and DAPs were banned at the end of 2008 - and that will help. Also the stabilization in house prices is helping with fewer delinquencies.

However many of these recent homebuyers probably aren't ready to be homeowners, and the delinquency rate will probably rise sharply - especially if house prices start falling again.

With 6% of 2009 loans ALREADY in trouble, how can we buy their argument that 2009 is turning a corner?

With 17.71% of all FHA-insured loans delinquent - 8.52% seriously delinquent - how can we possibly believe that a 0.53% cash cushion will be enough?

From The New York Times Housing Agency’s Cash Reserves Down Sharply

As recently as a few weeks ago, the F.H.A. had said that even under the bleakest economic forecast, its cash cushion would quickly recover. On Thursday, it abandoned that position.

“There is a real risk. Nobody has a crystal ball,” Shaun Donovan, secretary of housing and urban development, said in an interview. “We recognize there is a possibility that the reserves go below zero and stay there.”

Still, Mr. Donovan stressed that the agency, which had a role in one out of five home purchases in the last year, would not need a direct taxpayer bailout.

...

In line with many analysts, the agency expects the housing market to turn down again over the next nine months and then to recover. Under this projection, foreclosures would be manageable and the reserves would quickly grow.

...

Ann Schnare, a consultant who has analyzed the F.H.A. balance sheet, put the situation this way: “They’re running on empty.”

...

“They keep saying they’re going to outrun their problems, but some way, somehow, the taxpayer is going to end up on the hook,” said Edward Pinto, a former executive with Fannie Mae.

...

But as the market tumbled and the subprime outfits failed, F.H.A. loans became the next best thing. Brian Montgomery, who ran the F.H.A. for the Bush administration, said in a recent interview that the agency felt it had no choice but to open the doors to a broader group of applicants. Citing pressure from Congress and the White House, Mr. Montgomery said: “We had to let these loans through.”

Mr. Montgomery, now a consultant, says that anyone dismayed by the possibility of yet another bailout should feel a different emotion toward the Department of Housing and Urban Development and, for that matter, himself: gratitude. “They should be going over to the H.U.D. building and frankly thanking the career staff for saving them from a depression,” Mr. Montgomery said.