In a posting on the Department of Housing and Urban Development's official blog The HUDdle, Acting FHA Commissioner Carol Galante responded to discussions in the media and among FHA stakeholders on the health of FHA and the management of its business. Galante said that while the topics are important issues to the ongoing recovery of the economy, the future of the housing finance system, and to American taxpayers, such a discussion is only possible when it is based upon accurate information.
Galante's article discusses the impact of the housing crisis on FHFA's Mutual Mortgage Insurance Fund (MMIF) and the steps the agency has taken to address the damage including:
- Instituting a series of changes to the annual and upfront premiums;
- Significantly increasing oversight of lenders and enforcement of FHA requirements;
- Continuing aggressive enforcement of lender requirements to protect the fund from "bad actors" and clarifying the rules for lending;
- Strengthening borrower qualifications by requiring higher downpayments for borrowers with low credit scores and reducing allowing seller concessions;
- Reducing costs of premiums for FHA Streamline Refinance program to make homeownership more sustainable for existing borrowers;
- Making Streamline Refinance loans more accessible by reducing lender barriers;
- Making changes to FHA loss mitigation requirements.
Galante said that FHA is moving in the right direction to make FHA sustainable for the long term and the fund is in much better shape than it was in 2009. "There are still significant risks remaining, particularly if house prices continue to decline or underlying economic conditions worsen," but Galante said that FHA will continue to balance protection of the fund with the need to ensure the continued recovery of the economy.
The Acting Commissioner refers in her blog posting to a separate article also published on Tuesday by FHA in which the agency lists 19 myths about its capital, accounting, loan quality and actuarial modeling and provides answers to them. Here are some of the myths and FHA's response.
Myth 1. FHA will need a bailout.
Fact:. FHA said that the changes made by the agency since 2009 including enforcement actions that resulted in over $900 million in settlement moneys from banks and the premium increases makes it unlikely that FHA will require additional resources from the Treasury Department this year. Future assistance could be necessary if expected losses arising from further declines in home prices increase.
Myth 2. FHA would be declared insolvent by state regulators were it a private mortgage insurance (MI) company.
Fact: FHA says that unlike private mortgage insurance companies with profit expectations FHA is a government agency with specific public purposes, one of which is to assist housing markets at the very time that private firms chose to pull back from them. FHA has been a countercyclical force during times of economic stress, the government's risk is calculated, and FHA has taken significant actions to mitigate that risk.
Myth 4. FHA's capital levels can be manipulated by changing house price growth assumptions.
Fact: Congress' definition of FHA's capital requires net present value accounting and projections of life-cycle premium revenues and claim expenses. FHA cannot and does not manipulate its capital levels by changing house price assumptions. For the actuarial valuations that go into the capital ratio estimate, the house price assumptions of an independent vendor are utilized. For the annual budget and accounting reviews by OMB, the house price assumptions are those selected by the Council of Economic Advisors.
Myth 6. FHA is under-reserving for known losses because it does not account for expected losses on loans that are currently delinquent. Such accounting is at the heart of loss reserves for private firms.
Fact: FHA loss reserves do include expected losses for loans in 90-day delinquency, and for loans projected to have a 90-day delinquency in the future, thus its loss-reserve calculations capture the same information as do private loss reserves.
Myth 8. FHA is pursuing a strategy of growing its insured portfolio in an attempt to stay ahead of mounting losses on the loans on its books at the beginning of the housing downturn in 2007.
Fact: The expansion of FHA lending in 2008 and 2009 was entirely market based and driven naturally by the pull-back from the market of Fannie Mae, Freddie Mac, and others. Lenders came to FHA because other means of guaranteeing their mortgage loans were no longer available to them. FHA's increased role in the nation's mortgage finance system is a temporary one and its insurance volumes have decreased 34 percent since their peak in 2009 and its market share is declining for the first time since 2006. In fact, FHA endorsement volumes are returning to historical norms.
Myth 15. FHA's actuarial model underestimates its risk exposure by treating streamline refinance loans as if they are full payoffs when they are really more like loan modifications.
Fact: Streamline refinance loans do not disappear but are counted as newly insured loans, and with the risk characteristics that are appropriate for them. The actuarial model has a completely separate set of forecasting equations for streamline refinance loans, and they have consistently predicted higher default losses from those loans than from fully-underwritten loans originated in
the same time periods.
Myth 16. FHA loans today are just as risky as those it insured prior to 2008 because they still involve low downpayments and house prices are still falling.
Fact: Downpayments by themselves do not define the riskiness of any given loan. FHA has successfully insured low downpayment loans for many years, and has proven that loans these loans can be a vital and appropriate financing mechanism for responsible borrowers. Over the past three years, FHA has enacted the most sweeping reforms in its history to improve the quality of the loans it insures, including a policy that ties downpayment to FICO scores. In addition, the fact that a home is underwater does not in and of itself indicate imminent default.
Myth 19. The continuation of a $729,750 loan limit puts FHA at risk of significant losses.
Fact: The highest dollar value loans in the FHA portfolio actually have the lowest delinquency and foreclosure rates. At the same time, loans with initial balances above $625,500 (the GSE loan-limit ceiling) make up a very small percentage of FHA endorsement activity.
The complete list of myths and responses are available at http://portal.hud.gov/hudportal/documents/huddoc?id=MythsandFactsLoanPortfolio.pdf.