THE BASIS POINT

Ginnie Mae having banner year. FHA not so much.

Few think that the FHA will go away, although there are thoughts of somehow melding it in with Fannie & Freddie. Many look at today’s Federal Housing Administration (FHA) and think it hasn’t changed since it was created in 1934 — but it has.

The FHA initially insured fully amortizing 20-year loans combined with a 20% down payment. As a result, homebuyers accumulated nearly 30% in earned equity after four years, yet over its first 20 years, the FHA paid claims on only 5,712 properties, for a cumulative claims rate of 0.2%.

Industry analyst Ed Pinto continues with the history lesson:

“Lulled by this success, Congress periodically reduced the minimum down payment and extended the maximum loan term. By 1956, the FHA’s maximum loan-to-value (LTV) ratio stood at 95% and maximum loan term was 30 years. For a borrower leveraged at the maximum LTV and term, earned equity after four years totaled 9%, about enough to cover the cost of selling the home. A borrower and the FHA’s success depended highly on unearned equity accruing from house price appreciation. Higher leverage is a double-edged sword. It creates a windfall of unearned equity for home buyers and reduces losses for the FHA when home prices are increasing rapidly, but it exposes home buyers to foreclosure when prices were rising more slowly or decline. At the same time, the shift to higher leverage caused the FHA’s foreclosure rate to increase dramatically and inexorably over the decades.”

Recent figures show that over 17% of all FHA loans were delinquent, and that total delinquencies increased by 77,000 over August, the largest one-month increase since FHA Watch began tracking monthly delinquencies in September 2011.

An industry vet from Nevada writes:

“The FHA program was a wonderful program. Now, like everything else, the government has wrecked it. The MI is so high, the only reason you go FHA is because you don’t have the credit scores for FNMA/FHLMC 5% down. Is that subprime or what? The FHA winds up with the less qualified borrower, and then those idiots wonder why the loss factor is higher.”

And experts have wondered about the FHA’s net worth — it isn’t good, and below the minimum capital requirements set by Congress (does Congress care, or know?).

The September estimate of the FHA’s generally accepted accounting principles (GAAP) net worth is -$28.3 billion, down from -$16.3 billion in September 2011. The capital shortfall stands at $48 billion (using a 2% capital ratio) and $67 billion (using a 4% capital ratio).

The folks at GNMA, however, are having a banner year. They are different, remember: the FHA insures loans whereas Ginnie packages them up into securities. With roughly only 100 employees, Ginnie made about $1.2 trillion in the last fiscal year, or about $13 billion per employee!

Returning to the FHA, the industry carefully watches these delinquency numbers. Robert Pieklo with American Financial Resources points out that:

“Companies should watch Neighborhood Watch Compare ratios. Streamlines were taken out of the equation this month (quarter end). The national default rate is 1.25. If a borrower has 2 life events occur out of 100, you are in bad shape. But companies are in a weird spot, especially those that have a slightly higher CR. It seems that FHA’s market share is dropping like a brick – certainly for us the 700+ FICO score loan no longer best ex’s into a FHA loan. A conventional loan with MI is much better so it’s hard to get enough of the better borrower’s in to one’s numbers.”