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DPA Blamed for FHA Shortfall

Annual FHA report card released by HUD

Nov. 12, 2009

By MortgageDaily.com staff


The Federal Housing Administration's capital reserve level has fallen below the federally mandated minimum -- and loans that utilized seller downpayment assistance were to blame for all of the shortfall. The administration called FHA's recent expansion temporary and committed to a reduced FHA role as private investment returns to the mortgage market.

FHA's capital reserve ratio has fallen to 0.53 percent, the U.S. Department of Housing and Urban Development announced today. The ratio deteriorated from 3 percent in the fall of last year -- reflecting difficult housing market conditions.

The capital reserve ratio measures reserves held in excess of those needed to cover projected losses during the next 30 years. The findings were based on FHA's financial outlook, in coordination with the release of an annual independent actuarial study.

The report, presented to Congress, indicated that the capital reserve is now below the congressionally mandated threshold of 2.0 percent.

"Today's announcement is a major wakeup call for FHA and the lending community," Mortgage Bankers Association President and Chief Executive Officer John A. Courson warned in a statement from the Washington, D.C.-based group.

But Courson also called the report "no reason to panic," noting that the 2 percent reserve requirement was established to ensure FHA endures markets like today's.

The current reserve, including funds held in the Capital Reserve Account and the Financing Account, stands at $31 billion.

Significant losses have been sustained by the FHA fund on loans made prior to this year, according to HUD. The 2007 vintage is performing especially badly -- as badly as "FHA's worst-ever books from the early 1980s." HUD said that the report concluded, however, "that under most economic scenarios considered FHA's reserves would remain above zero."

The 2009 vintage is expected to produce net positive revenues. Already, 2009 loans have demonstrated a lower level of early payment defaults, with 90-day defaults during the first six payment months at just 1.42 percent compared to 2.65 percent for June 2007 originations.

Overall FHA delinquency of at least 30 days and including loans in bankruptcy or foreclosure was 17.71 percent as of Sept. 30. But late payments on just the 2009 vintage were 6.46 percent while the 2007 vintage was 32.27 percent. Last year's originations have a 23.98 percent delinquency rate.

The improvement in 2009 vintage performance was partially attributed to the elimination of seller-funded downpayment 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 statement said.

Claims on loans from last year with seller-funded DPA were around three times as high as non-DPA loans.

MBA's Courson praised the elimination of DPA programs.

HUD noted that as a result of seller-funded downpayment schemes, FHA's estimated economic net worth is $10.4 billion lower than it would have been if those loans hadn't been allowed. If FHA had those funds today, it would reportedly still be above the statutory required 2 percent.

FHA Commissioner David H. Stevens maintained his strategy of weeding out bad players.

"FHA will not tolerate fraudulent or predatory lending practices and we have enforced tighter standards and taken action against lenders who violate FHA origination and underwriting requirements, starting with the suspension of Taylor, Bean and Whitaker and most recently, actions against Lend America," Stevens declared in today's report.

Lend America, however, recently won a motion to maintain its FHA approval.

Robert Ryan was introduced at a press conference today by Donovan and Stevens as the agency's new chief risk officer. Ryan will coordinate FHA's efforts to concentrate risk management in a single division devoted solely to managing and mitigating risk.

Other actions recently announced to reduce losses included attempting to raise net worth requirements for mortgagees, implementing appraiser independence from originators and modifying approval and participation as an FHA mortgagee.

The report explained that FHA only charged an 0.50 percent periodic premium in 1990. Now the agency charges a periodic rate of 0.55 percent on mortgages with loan-to-values above 95 percent and also an up-front premium of 1.75 percent on purchase and refinance transactions and 1.50 percent on streamline refinances.

Annual savings to borrowers as a result of FHA refinances collectively added up to $1.3 billion.

HUD highlighted how the average FHA borrower now has a FICO score of 693 compared to 633 two years ago. But the agency acknowledged that FHA got stuck with lower quality loans as a result of adverse selection when mortgage credit was easily available. HUD expects the impact from adverse selection to rise as the economy improves and the conventional mortgage market recovers.

FHA originations climbed to $359.537 billion in fiscal 2009, which ended on Sept. 30. Business grew from $205.412 billion in fiscal 2008 and just $84.462 billion in fiscal 2007.

Included in the 2009 FHA volume numbers were $29.053 billion in home-equity conversion mortgages, up from $24.244 billion in 2008 and $24.625 in 2007.

HUD said FHA share for first-time homebuyers reached 50 percent in the second quarter.

But HUD Secretary Shaun Donovan called FHA's expanded role temporary, though necessary in economic downturns.

"The administration is committed to ensuring that the FHA steps back as private capital returns to the market," Donovan stated in the news release.

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