To watchdogs, the Federal Housing Administration is “a powder keg that will explode” according to Senator Christopher S. Bond (R-Mo.). However, the FHA Chief Commissioner David H. Stevens denies this belief and says the FHA will not need government financial intervention.
All this came about after the FHA announcement on September 18th by David H. Stevens that the FHA’s reserves are set to fall below the legally mandated level. With foreclosures rising, their funds are endangered of exhaustion.
The FHA commissioner believes that a series of policy changes that will reduce its risk over time to future losses will be enough to strengthen their reserve funds over the next two years. He stressed that there will be no taxpayer bailout. The fund that is scheduled to fall below legally mandated levels is a secondary reserve.
However, with the FHA ensuring more mortgages as banks have tightened lending requirements, it leaves a risk that the FHA may be outstripped of its reserves. Bert Ely, an independent banking consultant stated, “They’re putting a lot of mortgages on their books, many of them taken out by weak borrowers at a time when unemployed is still high. None of this bodes very well for the FHA down the road.”
The FHA stated that 80% of its business is now with new-home buyers, and that “without FHA, there would be no housing recovery.” This is best seen in the explosive growth in the number of mortgages the FHA insures. In 2006, during the housing boom as lenders offered subprime and other risky mortgages, the FHA insured just about 2% of the mortgage market. Now the FHA insures over 23% of the mortgage market and it continues to grow.
Though with the increase volume, it has exposed the FHA to greater risk. The percentage of their FHA-backed loans is at least 90 days overdue in the second quarter at 7.78%. This is up from 5.43% a year earlier.
How the FHA Will Mitigate Their Risk
First and foremost, the FHA does not plan to raise mortgage insurance premiums; instead they are trying to reduce their risk of future losses by proposing new rules on lenders. These rules would require lenders to have at least $1 million in cash and other assets, up from the $250,000 to limit losses passed on to the FHA.
They will also cap refinancing at 125% of the current home value, and halt certifications of mortgage brokers to issue FHA-backed loans. Lastly, they will appoint their first chief risk officer.
Initial Response to Changes
The Mortgage Bankers Association supports most of the changes proposed by the FHA Chief, but is concerned about the higher net worth standard for lenders, asking for the increase to only be $500,000.
There is also some concern regarding the risk of increased fraud as the FHA’s loan portfolio continues to expand. HUD Inspector General Kenneth M. Donohue told Congress in June that in the past, period of high volume at the FHA show “that the program was vulnerable to exploitation by fraud schemes.”
Stevens, the FHA Chief, believes that the new changes will help reduce fraud.
What is the FHA?
The Federal Housing Administration, known as the FHA is a government agency created as part of the National Housing Act of 1934 during the Great Depression. The goals of the FHA are to improve housing standards and conditions, stabilize the mortgage market, and provide an adequate home financing system through mortgage loan insurance programs.
The FHA is fully funded through fees paid by homeowners who have FHA-backed loans. The FHA insures mortgages made with a down payment of as low as 3.5% of the total loan value.