Obama bolsters program that insures home loans
More homebuyers depend on government-insured FHA loans and defaults are rising. Federal housing officials take steps to lower the program's risk.
By Tami Luhby
September 18, 2009
With a growing number of homebuyers depending on government-insured loans, the Obama administration is taking steps to shore up the Federal Housing Administration program.
Rising demand and a slower-than-expected rebound in home prices are pushing one of FHA's reserve accountsbelow the 2% ratio mandated by Congress, said Commissioner David Stevens. The capital reserves are a cushion against expected losses in the program, which has suffered soaring defaults amid the housing collapse.
The FHA has skyrocketed in popularity during the mortgage crisis since it backstops banks if borrowers stop paying. Housing experts are growing increasingly concerned about the agency's ability to handle rising numbers of defaults.
The drop in reserves, however, will not require a taxpayer-funded infusion into the housing agency, nor an increase in insurance premiums that FHA borrowers pay, Stevens said. The capital reserves, which are determined by an independent auditor and reported to Congress in November, will rise above the minimum threshold within a few years as the housing market recovers.
The agency's overall reserves stand at more than $30 billion, a record level thanks to the large influx of premium-paying borrowers, Stevens said. It covers more than 4.4% of its insurance commitments.
"To be clear, the fund's reserves are sufficient to cover our future losses, so the FHA will not require taxpayer assistance or new congressional action," Stevens said.
Still, the agency is taking a number of steps to reduce the riskiness of the program, which allows borrowers to purchase a home with as little as 3.5% down. It plans to hire its first chief risk officer in its 75-year history and to increase net-worth requirements for approved lenders to $1 million, up from $250,000. Lenders will also be responsible for any losses resulting from fraud on the part of mortgage brokers.
The changes may eliminate some smaller FHA lenders and will likely weed out some of the riskier borrowers, Stevens said.
These moves, particularly hiring a chief risk officer, are important steps that need to be taken, said Howard Glaser, head of the The Glaser Group, a financial services analytics firm. The agency grew so quickly that it was difficult to monitor the quality -- and riskiness -- of the loans being made.
While the FHA may want to raise borrower premiums or tighten its underwriting standards if defaults continue to rise, Glaser said the agency's $30 billion reserve is enough to cover its current loss estimates.
"It's surprising they are doing as well as they are," said Glaser, a former Clinton administration housing official.
FHA propping up housing market
As banks have clamped down on mortgage lending, the FHA program has emerged as one of the few ways people can buy a home these days. Banks are more willing to make FHA loans because they come with a federal guarantee to cover losses if the borrower defaults. And borrowers can more easily qualify for FHA loans because they only need 3.5% down and can have lower credit scores.
As a result, demand for FHA loans has exploded. FHA loans now account for 23% of the market, up from 2% in 2006, Stevens said. Some 80% of first-time homebuyers go through the agency.
The agency, however, has also seen a spike in delinquencies amid the mortgage meltdown. Some 14.42% of FHA loans were past due in the second quarter, up .58 percentage points from the same period a year earlier, according to the Mortgage Bankers Association. Just under 3% of FHA loans were in foreclosure, up .22 percentage points.
Concerned about rising defaults, the agency has raised its standards for new borrowers. Only 7.5% of the portfolio has a credit score below 620, down from 50% two years ago. The average score is 690, versus 630 two years ago.
"The quality of the current FHA book is significantly better than anything seen in the FHA portfolios in recent years," Stevens said.
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