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FHA Risk Grows as it Filled Void Left by GSEs

(8/23/10)

It was the Federal Housing Administration (FHA) which picked up the slack in 2007 and 2008 as homeowners attempted to refinance their way out of sub-prime as well as other unconventional mortgages. As a result of the surge in FHA growth during that time, required capital reserves were depleted in the course of incurring FHA loan losses. The capital reserves required by congress which were set at 2% have fallen as low as 0.53% and $3.5 billion in cash and Treasuries and nearly $30 billion in what is a designated financing account. Providing the FHA with the flexibility to correct its premium structure when reserves have fallen to an all time low, will help restore the fund to congressionally mandated levels. For forecasting purposes, auditors place significant emphasis on home prices when estimating potential loan losses. Through the third quarter of 2009 projected FHA claims due to default were 20% less than expected and almost $4 billion less than anticipated. The recent Senate bill H.R. 5981 permits the FHA to raise its annual premium a full 1% from 0.55% to 1.55%. Also under its new authority, the FHA intends to make a downward adjustment to the upfront premium and base the annual premium on a loan-to-value risk adjusted basis so that loans with lower down payments require higher annual premiums.

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