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The FHA Attempts to Avoid Becoming Another Fannie Mae to the Taxpayers

(10/01/10)

The Federal Housing Administration's (FHA) fiscal year ended on September 30 and 2010 was the agencies second best year on record, only 2009 trumped it, as up to 1.76MM loans were funded. The FHAs goal is to serve the underserved markets, particularly in the first time buyer category, as a lender of last resort as well as in the depressed purchase market arena where it absorbs up to a 50% market share in some areas. To date, the FHA has not cost the taxpayers a penny however its market share has grown 10 fold in the past five years where its reserves have fallen below the level required by Congressional statute sparking concerns. In fact last year the reserve ratio had fallen below the required 2% minimum down to as low as 0.53%. An FHA reform bill that was passed by Congress and watered down by the Senate included providing the FHA with an opportunity to control the rate on its insurance premium. The hope is that with the new risk-adjusted premium practices set in place, the FHA will be able to increase its insurance fund in the order of $300MM per month. Under their new insurance practices, the FHA will move away from their previous requirement of collecting an upfront premium of 2.25% down to collecting 1.00%, at the same time adjusting the monthly premium upwards from 0.55% annually to 0.85% annually for loans with down payments below 5% (LTV<95%) and to 0.90% annually for loans with down payments of less than 5% (LTV>95%). The FHA has also strived to improve its credit standards as well as its risk management and oversight policies by putting new credit score guidelines in place. Credit scores below 500 are no longer eligible under FHA guidelines and borrowers having credit scores of 500 to 579 are now required to make a 10% down payment. As a result of these changes in the FHA standards, it is hoped that an additional $4 billion will be generated in 2011 however when setting forecasts for capital reserves, home prices, interest rates and potential foreclosures are all factors which weigh heavily on the ultimate outcome.

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