The Federal Housing Administration (FHA) has been generating a fair amount of media buzz the last couple months, but unfortunately, little has been positive. Beginning with a University of Pennsylvania study that severely questioned the agency’s finances going forward, there have been a number of accounts profiling the sudden deficiencies in the FHA’s solvency.
Using yet another takedown of the FHA as a starting point (an American Enterprise Institute piece charmingly headlined “Bet the house: why the FHA is going (for) broke“), the article’s writer, Peter Miller, points out that the FHA’s finances seem to be getting better, not worse, an odd development for an agency supposedly on the financial precipice.
For instance, down-payment requirements at the FHA have been increased from 3 to 3.5 percent, more than 1,500 sub-standard lenders have been expelled from the program, claims against the program are doing down, and, as a result of recent congressional action on the payroll tax extension, FHA insurance premiums will increase.
Even more, claims against the agency’s insurance plans were down 22 percent year-over-year in October, and when Miller perused the FHA’s book of business, he found a historical trend in the agency’s finances, from positive returns in 1992 to 1999, negative from 2000 to 2008 and positive again from 2009 to the present. According to a recent Department of Housing and Urban Development release that Miller quotes, “the actuaries found that the FY2010 and FY2011 books are expected to be very profitable, providing significant net revenues to offset losses on earlier books.”
Though it may seem, initially, like an immediate about-face concerning the FHA’s finances, Miller writes that the elimination of the “seller-funded down payment assistance loans” have had an extremely positive effect on the agency’s books.
As Miller explains, “In the days when the private sector was offering toxic loans, many buyers wanted to purchase a home but did not have 3 percent down or a gift from a family member. Some sales were arranged so that the seller made a donation to a charity and the charity would make a gift to the buyer who could then qualify for an FHA loan.”
With those arrangements eliminated, those borrowers are less prominent on the FHA’s books.
Concluding his piece with recommended changes for the FHA, Miller writes that the agency should cut out its reverse mortgage program, which resulted in 1,367 claims in 2011, a 66.7 percent increase from 2010. With home values continuing to decline, the likelihood of loss under the program is high.
“In other words, rather than dump the entire FHA program and the millions of people it serves, make selected changes,” Miller writes.