FHA poised to raise loan costs - again - in 2013

by Broderick Perkins

Federal Housing Administration (FHA) mortgages are going to cost you even more in the New Year.

(11/21/2012) - Faced with a $16.3 billion insurance-fund deficit, the FHA, a division of the U.S. Department of Housing and Urban Development (HUD), will raise mortgage insurance premiums and sell more foreclosure-bound loans in 2013, among other efforts to keep from sinking further underwater.

The FHA's annual financial status report to Congress, issued Nov. 16, says the deficit doesn't mean it doesn't have the funds to pay insurance claims or that it will immediately need to tap the Treasury (read: "taxpayers") to further protect its $1.1 trillion portfolio of backed mortgages.

However, "aggressive steps," are necessary to offset shortfalls and the shrinking capital reserve ratio of FHA's insurance fund, which in 2012 fell below zero to a negative 1.44 percent.

That's far below the 2 percent level mandated by Congress. In 2011, the level slipped to only a little more than 0.2 percent.

FHA insures low-down payment home loans that cover as much as 96.5 percent of a home's value. For decades, the loans have been popular with first-time, lower-income homebuyers. More recently, under post-boom, tighter underwriting conditions, higher income borrowers joined the fold.

FHA loans effectively replaced toxic, subprime loans and other predatory loans that contributed heavily to financial turmoil, the housing market crash and, ultimately, the Great Recession.

The agency lost $70 billion on loans it insured from fiscal years 2007 through 2009. More than 17 percent of all FHA loans were delinquent in September.

FHA's 'Aggressive steps'

"While the loans made during this administration remain the strongest in the agency's history, we take the findings of the independent actuary very seriously. We will continue to take aggressive steps to protect FHA's financial health while ensuring that FHA continues to perform its historic role of providing access to homeownership for underserved communities and supporting the housing market during tough economic times," said FHA Acting Commissioner Carol Galante.

Those "aggressive steps," scheduled for 2013, include:

• An increase of 10 basis points, or 0.1 percent, in the annual insurance premium paid by borrowers on new FHA loans. The increase is expected to add $13 per month for the average borrower and is designed to boost the FHA's financial status without limiting access to its loans.

In recent years, the FHA has stiffened underwriting rules and increased insurance premiums

• Reversing a policy that allowed borrowers to pay insurance premiums for only 10 years, even while FHA's insurance guarantee remained in effect for the 30-year life of a loan. The change will apply to new loans.

• Through the Distressed Asset Stabilization Program (DASP), continuing sales of mortgages headed for foreclosure. The program, slated to sell 10,000 homes per quarter next year, allows investors and borrowers the opportunity to avoid costly foreclosures and gives some homeowners the opportunity to remain in their homes.

• Revising loss mitigation efforts to allow more families in financial distress to avoid foreclosure by receiving greater levels of payment relief.

• Expanding short sales to allow more distressed borrowers to escape foreclosure.

Justifying 'aggressive steps'

In the current study, compared to last year, FHA used a more conservative analysis of home-price appreciation to determine steps it needs to take to protect its capital. It also considered declining mortgage interest rates, which are good for consumers and the overall economy, but not so good for the FHA when borrowers refinance to a new mortgage with lower rates, which come with relatively lower insurance premiums.

Also, recommendations from the Government Accountability Office (GAO), HUD's Inspector General and others, forced FHA to direct the study's actuary to more precisely predict how losses are reflected in the economic value of its insurance fund.

"FHA has weathered the storm of the recent economic and housing crisis by taking the most aggressive and sweeping actions in its history to reform risk management, credit policy, lender enforcement, and consumer protections," said HUD Secretary Shaun Donovan.