After what has panned out to be a particularly rough couple of years, it appears as if the Federal Housing Administration (FHA) is on the mend. Accordingly, after two years in the red, the FHA has become the beneficiary of promising gains in its insurance fund. Perhaps even more importantly, the encouraging situation will no longer require emergency cash bailouts. For all intents and purposes, the FHA appears poised to help more homeowners.
“I’m pleased to report the fund is back in the black, and it’s on a strong track,” said Julian Castro, U.S. Secretary of Housing and Urban Development in a briefing before a small group of reporters.
Despite the good news, there is no plan to lower the cost an FHA loan will cost consumers. The FHA, which currently requires down payments as low as 3.5 percent, inherited the mess left by the last recession. Over the course of the downturn, and in particular the worst years, FHA volume soared to about a third of all loan originators. That, however, was accompanied by unforeseen circumstances. By 2012, its insurance fund had gone negative, with the fund projected at negative $16.3 billion; it was then required to take a cash draw from the U.S. Treasury to cover losses.
Fortunately, steps were taken to correct the problem and we are now seeing the results of those measures.
“FHA has taken several prudent actions to improve the fiscal health of the fund, and those actions have led to the stronger position that we’re in today,” said Castro.
In removing its insurance fund from the doldrums of the recession, the FHA was forced to take drastic steps. Since taking on the burden of the housing crisis, the FHA has more than doubled its annual insurance premiums. Subsequently, the agency raised the average credit score required to borrow, as to prevent more from defaulting. Essentially, the FHA was making more in premium payments with lower risk. As a result, the value of the mortgage insurance fund has increased by $21 billion in the past two years, and now stands at $4.8 billion in value. The FHA’s capital reserve ratio is now at 0.41 percent, well below the required 2 percent level, but in the positive. It is now projected to clear 2 percent by 2016.
The revival of the FHA is due largely, in part, to what people are calling an “aggressive policy action.” As part of the plan, the FHA started to crackdown on lenders that didn’t follow previously agreed upon underwriting guidelines. These lenders were partially to blame for giving loans to borrowers who couldn’t necessarily afford them. In targeting these institutions, the FHA was able to improve delinquency rates by 14 percent and recovery rates by 16 percent.
However, with the changes, the FHA has seen a dramatic drop in volume, with loans backed by the smaller Department of Veterans Affairs now surpassing its weekly application volume. Once standards and premiums were raised, people began to make the switch.
With the economy on the right track, it begs the question: will the FHA consider lowering its premiums now that it is back in the black? Fannie Mae recently announced the return of its 3 percent down payment loan product, but Castro did not seem concerned that it would cut further into FHA’s volume.
“We’re confident that the fundamentals of the fund are strong. The volume is down, there’s no question about that, but we are confident of the continued health of the fund going forward,” said Castro.
While a reduction on premiums has yet to be seen, some changes may loom on the horizon. Lenders, in particular the ones who neglected underwriting guidelines in the past, are being schooled on policies. With the proper “incentive” and education, lenders may be able to remove some of the costly “overlays” they are placing on borrowers that pose a significant risk. Moreover, those who receive credit counseling may be able to receive a reduction on their monthly premiums.
Despite the increasing need for more credit within the housing sector, independent actuaries have lowered expectations pertaining to FHA volume in the next couple of years.