Losses on loans where the seller provided down payment assistance are ultimately expected to exceed $13 billion at the Federal Housing Administration. Had such programs been banned, FHA asserts, its capital reserve ratio would be in compliance with congressional mandates.
During fiscal-year 2010, FHA insured 1.75 million mortgages for $319 billion, according to the agency’s annual report to Congress
The capital reserve ratio of the Mutual Mortgage Insurance Fund was 0.50 percent in fiscal 2010. Last year’s ratio was 0.53 percent of insurance in force.
The ratio, which measures reserves in excess of those needed to cover projected losses over the next 30 years, is far below the 2 percent mandated by Congress. But using “conservative assumptions” about home prices and given no new policy actions, FHA’s capital ratio is expected to “approach” 2 percent in 2014 and exceed the statutory requirement by the following year.
The economic value of the single-family insurance program grew to $4.7 billion in 2010 from $3.6 billion in 2009 as claims “declined significantly” from last year.
Recently originated loans are performing better and helped boost FHA’s total capital resources by $1.5 billion to $33.3 billion, “their highest level ever.
Loans insured since 2009 added $4.8 billion to economic value and are expected to generate $28.3 billion in economic value by 2016.
FHA attributes the improvement in value for new vintages to “sweeping” and historical reforms in credit policy, risk management and consumer protections. Increased lender enforcement was also cited, as was an overhaul of the lender approval process that made wholesalers liable for their mortgage brokers and increased net worth requirements.
A new premium structure is projected to add $300 million each month to the insurance fund.
But FHA is sustaining significant losses from loans that it insured before 2009 — which account for 70 percent of projected single-family loan losses.
Loans involving seller-financed down-payment assistance have resulted in $6.6 billion in claims so far. FHA expects that such loans will ultimately cost $13.6 billion.
“Without these seller-financed loans, FHA’s capital ratio would be above the congressionally mandated 2 percent threshold,” the report said.
“Even in the actuaries’ worst-case stress test scenario, FHA’s capital resources remain sufficient to cover projected claim losses and FHA would not require a taxpayer subsidy,” the report said.
