THE BASIS POINT

The Drama With FHA Continues

For many months, analysts have been pointing to FHA’s reserve fund, saying it is below congressionally mandated levels and some suggesting it is basically insolvent.

Even the White House, in its budget proposal, noted that the agency’s capital reserves would run out in the coming year, forcing it to draw as much as $688 million from Treasury.

But wait: HUD Secretary Donovan later said that the banks involved in the $25+ billion mortgage servicing settlement had agreed to pump close to $1 billion into the FHA. He also said the agency would raise premiums on loans it insures in a further step to bolster its reserves, with the numbers coming this week.

Broadly speaking, HUD’s 2013 budget requests $44 billion from Congress, about the same as this year. In addition a good piece on HUD’s budget from Mortgage News Daily said:

HUD is asking for authority to guarantee $400 billion in mortgages through FHA’s Mutual Mortgage Insurance Fund which is expected to provide 1.2 million single family mortgages, $149 billion in loan volume, during the year and $500 billion in Ginnie Mae guarantee authority in order to help finance a wide array of government-insured products

So let’s see … first, additional guarantee fees are levied by the agencies for the next 10 years in order to pay for a payroll tax cut for two months. And now the five banks involved in the servicing settlement are chipping in $1 billion in order to support the FHA?

Soon the FHA’s increase in mortgage insurance premiums will at least go to support itself. The FHA now backs nearly $1 trillion in mortgages, and more than 9% of those loans are at least three months past due, WSJ’s Nick Timiraos reported Monday.

Remember that the FHA doesn’t make loans but instead insures lenders against losses for mortgages that meet its standards, and earns income by charging upfront and monthly insurance premiums to borrowers.

The agency said Monday it would increase the annual insurance premiums by .25% for loans that exceed $625,500.

Right now that premium is already pretty steep at 1.1 to 1.15. But FHA rates are lower than conventional rates: 3.75% right now. So rate plus mortgage insurance (which can be eliminated if borrower pays loan down to where they have 22% equity at or after the first five years) is 4.85% now. Still attractive for borrowers without a 20% down payment now.