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FHA may not be “the next subprime mortgage product,” according to remarks prepared for presentation to congress this morning by HUD. Secretary Shaun Donovan said that FHA loan reserves will remain positive “under all but highly severe economic scenarios.”  He said that HUD had learned from recent history, “that the market is fragile, and we have to plan for the unexpected.  Donovan informed members of the House Committee on Financial Services that FHA, in spite of actuarial reports that its secondary reserve level has fallen below the required 2% to 0.53% of its total insurance-in-force, is capable of withstanding the current economic downturn.  That economic uncertainty is complicated by an organization we inherited that, to be honest, was simply not properly managing or monitoring its risk.  Credit and risk controls were antiquated.  Enforcement was weak.  And our personnel resources and IT systems were inadequate.  “Little of this may have been obvious when FHA’s market share was 3% as recently as 2006.  But when our mortgage loan markets collapsed last fall, and homebuyers increasingly turned to the FHA for help, the potential consequences of these lapses in risk management became very clear.  His department, he said, is in the process of drafting new policies to address the quality of FHA’s current loan portfolio, improve the performance of future FHA mortgage loans, and restore the capital reserve above its mandated levels. 

The government loan agency is looking at several measures to improve the quality of its portfolio going forward.  It plans to reduce the maximum permissible seller concession from 6% to 3% because the current level exposes the FHA to excessive risk by creating incentives to inflate appraised values.  The change, he said, will bring FHA into line with industry norms and even further reductions may be considered.   The minimum borrower FICO score will be raised although the final number has not yet been determined.  The agency is studying whether new FICO minimums should be accompanied by changes in other underwriting criteria for lower down payment loans.  The up-front cash that a borrower will be required to bring to the table for an FHA loan will also be increased to make sure that borrowers have “skin in the game.”  The exact way this will be accomplished is still under study.

These proposed changes, Donovan said, only require administrative decisions on the part of HUD, however, Congress will be asked to pass legislation to increase premiums.  The current up-front premium of 1.75% is below the statutory cap of 3% but the annual premium is at the maximum.  Raising premiums, he said, is the most effective means of raising capital for the reserve fund with the least impact per borrower.  Donovan said that more than 7% of the future losses the FHA is anticipating will come from loans already on its books, so, as Mortgage News Daily reported on Monday, the agency is taking steps to enforce lender accountability.  Donovan said that, in addition to holding FHA lenders responsible for their origination quality and compliance and increasing reviews of that compliance, lenders will be required to indemnify the FHA for losses resulting from their failures to meet FHA loan requirements and will be sanctioned nationally for any improper activities rather than through the FHA’s current policy of sanctioning individual branches.  The secretary reported that the anticipated changes are merely the latest in a series of improvements FHA has made to shore up its lending activities. 

In 2008, Congress put an end to the practices that led to the most troubled mortgage loans in FHA’s portfolio – so-called “seller-financed down-payment assistance” loans. Without these FHA home loans, Donovan said, the actuary reported that secondary reserves would have remained above the two percent threshold. “This year, we’ve taken several additional steps. We’ve steeply increased enforcement efforts, having suspended seven lenders, including Taylor, Bean and Whitaker and withdrawn FHA-approval for 270 others, including Lend America just this week.”

Credit and risk controls have been tightened. Requirements for the Streamlined Refinance program have been toughened with several improvements to the appraisal process and proposing a rule to increase net worth requirements for all FHA lenders. The latter has just entered the notice and comment period.  The agency has hired a permanent Chief Risk Officer to provide a comprehensive and thorough risk assessment and ensure that the assumptions going into the agency’s modeling reflect the most current economic conditions.

FHA is working to increase staffing and technical capacity and upgrade our technology systems and delivered FHA’s first comprehensive technology transformation plan to Congress in September.  The Secretary detailed the active role that FHA is taking in the current housing market, insuring almost 30% of purchases and 20% of refinance loans in the housing market, and financing the majority of minority home purchases.  But, he said, “as important as the FHA is at this moment, I want to emphasize that the elevated role it is playing is temporary – a bridge to economic recovery helping to ensure that mortgage finance remains available until private capital returns.”  Article was written by Jann Swanson  .

The housing sector may be rebounding but the FHA loan defaults continue to rise.  FHA mortgage rates hit record lows this quarter, but the FHA loan reserves hit seven year lows as well.  The Federal Housing Administration, which has played a crucial role supporting American home buyers after the collapse of the mortgage market, has burned through a huge cash reserve in less than a decade and could soon wind up with what amounts to an automatic taxpayer bailout if the agency’s fortunes don’t improve, according to a review of FHA loan finances.   Senior FHA officials have assured Congress that the agency will not need a bailout, which would be politically sensitive for lawmakers to approve after the government has already spent hundreds of billions of dollars rescuing financial companies.   But the agency’s complex funding mechanisms little understood in Washington, including on Capitol Hill do not require the FHA to turn to Congress if the agency cannot cover losses on its outstanding loans. The agency, which collects premiums from borrowers who take out FHA mortgage loans, has been automatically drawing down on money it deposited with the Treasury Department when the FHA was flush with cash. Those funds have dwindled as the FHA’s losses grew. If the losses continue unabated, the FHA would still receive money from Treasury. “It is absolutely a myth that they would have to go to Congress for money,” said Marvin Phaup, a former budget analyst at the Congressional Budget Office and now a budget expert at Pew Charitable Trusts. “The FHA has permanent authority to get money from the Treasury because it is backed by the full faith and credit of the federal government.”

Below the FHA loan threshold

The government is legally required to ensure that the balance in the FHA’s emergency reserve fund does not drop below 2% of outstanding FHA loans. Over the past five years, starting during the years of the housing boom and continuing into the bust, FHA’s reserves have tumbled and are now below that threshold, according to the agency.

Under a 1990 law, the FHA turns over to Treasury each year whatever excess money the agency expects to have left over after it pays losses on insured mortgages from what is known as the financing fund. The excess money is credited to the FHA’s emergency reserve fund. In those years when the FHA underestimates its needs, it automatically gets an infusion from Treasury to make up the difference.  FHA officials say it is incorrect to consider these payments from Treasury as a taxpayer subsidy. The agency is in effect tapping money it previously parked with Treasury. But if losses on FHA-backed loans continue, the agency could find itself overdrawn, yet payments from Treasury would not stop. They would automatically continue, rescuing the agency with taxpayer money.

The FHA had been accumulating money ever since its emergency reserve fund was set up in 1992. The premiums collected by the agency from borrowers taking out FHA-backed loans regularly exceeded its liabilities. But the trend turned sour even as the housing market flourished. Leading up to the boom, private lenders started offering no-down payment and low-down payment mortgages to reasonably low-risk borrowers, effectively luring away some of the FHA’s most reliable borrowers with less expensive loans.   “FHA could not compete as well for the best borrowers, and it was left with some of the riskier borrowers,” said Mathew Scire, a director at the Government Accountability Office. Some of the FHA loans left on HUD’s books started going bad during the first half of this decade.

In each of the past seven years, the FHA has had to take money from its reserves to replenish the financing fund. In fiscal 2004, it transferred $7 billion in reserves a record high at the time to cover losses on loans from 1992 through 2003.   This recalculation prompted a study by the GAO, which attributed the re-estimate to the FHA’s financing of increasingly risky borrowers from 1995 onward as it lost ground to private lenders and loosened lending guidelines. Many of the losses were also attributed to a now-defunct program that encouraged defaults by allowing home sellers to help cover down payments for buyers.

As home prices fell, the downward trend continued. In fiscal 2009, when the agency recalculated its expected losses for loans made in previous years, it found it needed to transfer $10.3 billion from its reserves to its financing fund to cover losses, topping its previous record.   Then, when the housing market swooned and prices fell, many borrowers who suddenly owed more than their homes were worth fell behind on their mortgages. Defaults spiked. About 24% of FHA loans were in default in 2007 and 20% in 2008, according to the agency. The agency’s reserves kept tumbling.

FHA’s reserves were $10.04 billion as of June 30, the lowest level in nearly a decade, according to agency data. Seven years ago, the fund had twice as much cash. It remains in the black only because it has accrued interest.   More recent data, due to be released in an audit this month, will show that the reserve fund fell below the federally mandated level as of Sept. 30 for the first time since the fund was set up, agency officials recently said. The excess money in that fund is no longer enough to cover 2% of outstanding FHA loans, as required by law.

This year’s audit was scheduled to be released on Wednesday but FHA abruptly delayed it, citing problems with financial-stress tests it had requested that went “above and beyond” what the audit typically entails. Agency officials declined to detail the nature of these problems.   “I don’t know what ‘above and beyond’ economic scenario testing FHA asked [the auditing firm] to do, but it’s pretty easy to envision how a ‘truly stressful’ scenario would wipe out” the FHA reserves, said Thomas Lawler, an economist and housing consultant, in his newsletter last week.

FHA Commissioner David H. Stevens has said that the audit results will appear dire because they offer a snapshot of the agency’s financial standing at the depths of a severe recession without taking into account new mortgage loans the FHA will insure or the fact that many of these FHA home loans have been made to more creditworthy borrowers than the FHA typically caters to.   Stevens also noted that the FHA’s financing fund now has about $20 billion, with the reserves as a back-up.   But he said agency officials were watching the housing market to see if they have to rethink their calculations. “Any worsening economic downturn, beyond what’s anticipated by the audit, could have a greater adverse impact to capital and would be reason for caution,” Stevens said in an interview.

Covering future losses

Each year, the FHA estimates how much money it will need in its financing fund to cover future losses on all of its outstanding FHA loans and how much, if any, will be left over. Adding up those annual estimates since 1992 shows that the FHA had over time projected its revenue from premiums would exceed costs by $33.8 billion, and this surplus would move into the emergency reserve fund.   But almost exactly the opposite happened. The FHA had to shift a total of $34.4 billion out of the reserve fund and into the financing fund to cover losses. If not for the interest it collected over the years, the fund would be $647 million in the hole, instead of $10.04 billion in the black, according to the agency.

A few budget policy experts say the interest payments mask the true cost of the FHA mortgage-guarantee program. But other experts say accruing interest is legitimate and that several federal trust funds operate that way, such as the Social Security and the highway trust funds. They collect taxes from consumers and interest on those taxes.   “These trust funds were intended to have a dedicated source of revenues over time, and therefore it make sense to count interest,” said James Horney, director of federal fiscal policy at the Center on Budget and Policy Priorities. “It’s not phony accounting. If the contributions you put into a trust fund are not earning interest, then you don’t build up an adequate amount to cover future needs.”  Article was written By Dina ElBoghdady.

Tennessee mortgage rates remain attractive for borrowers looking to purchase a home with an FHA loan in the South.  Qualified Tennessee mortgage applicants may qualify for 30-year fixed rate FHA loan at 4.875%.  15 Year home loan terms are available at 4.5%.  FHA refinance transactions remain the hot ticket for borrower looking to lock into a low fixed rate loan.  Tennessee home mortgage loans continue to be a vital component in rebuilding the Southern housing sector and the affordable mortgage rates make refinancing and new home financing very appealing. Congress just passed the bill that makes the 2009 FHA loan limits available in 2010.  For specific loan restrictions see the Tennessee FHA Loan Limits online.

Time may be limited for funding FHA streamline loans with FHA’s new rules.  The FHA-to-FHA Streamline Refinances are effective with case numbers assigned on November 17, 2009. That gives FHA home loan originators only a few weeks to originate loans under the old guidelines. What has changed? Just about everything!

o    New FHA seasoning requirements;

o    Revised requirements for FHA loan payment histories;

o    Required a net tangible benefit to the FHA borrower;

o    FHA now has a maximum CLTV;

o    Required verification of assets and employment

The latest Zillow Mortgage Rate report indicated that Pennsylvania mortgage rates had increased slightly from 4.87% to 4.88%. FHA mortgage rates ranged from the lowest rate of 4.71% in New Mexico to the highest rate of 5.13% Wyoming. Presently, Pennsylvania mortgage loan application volumes have increased at a rapid pace because borrowers want to lock in while mortgage rates are low.   FHA presents a good opportunity for many of the struggling homeowners in the state to refinance into a fixed rate loan that they are happy with.