FHA Home Loans Refinancing

FHA Audit Reveals Concerns from Lenders Across the Country

11.14.12

Just when you thought the Federal Housing Administration was out of the wood, a new report indicates that delinquencies and defaults have been rising again on FHA home loans. Today, FHA insured more than half of all mortgages for first-time home buyers last year may soon be forced to seek a bailout as their reserves have begun to dwindle. The Federal Housing Administration has always been able to fund their own financing initiatives through the annual mortgage insurance premiums charged to borrowers. But next week FHA will issue an independent financial audit that may set the stage for the FHA’s first-ever draw from the U.S. Treasury, Bloomberg reports.

The FHA has been hard-hit by foreclosures on FHA loans originated between 2005 and 2008 and has taken steps to strengthen its capital reserves, including raising mortgage insurance premiums three times in 2010 and again this year. FHA has moved away from the zero down loan platform that steam-rolled the sub-prime mortgage market in 2006 and 2007. FHA has tightened credit standards and prohibited seller funding of buyer down payments, a practice the agency estimates will cost it $14 billion on loans issued before 2009. As of June 30, 25.8% of FHA’s 2007 mortgages, 24.9% of its 2008 loans, and 12.2% of its 2009 liens were seriously delinquent, according to the Wall Street Journal. While FHA home mortgages made in subsequent years have had higher standards, new income from those loans may not outweigh the losses from the previous housing bubble-era loans, Bloomberg said, citing anonymous sources.

In last year’s annual report, the FHA noted its capital reserve ratio, which measures reserves in excess of what’s needed to cover projected losses over the next 30 years, had fallen to 0.24% from 0.5% in 2010. But an expected recovery in home prices prompted the agency to project capital reserves would return to a congressional mandated 2% ratio by 2014. This year’s report may be more pessimistic than last year’s because of changes in its economic modeling, lower expectations for home prices, and a revised assessment of loans from earlier years that have been refinanced more recently, Bloomberg said. The Department of Housing Development has repeatedly said it will not require a taxpayer bailout. The National Association of Realtors has supported that stance, and urged Congress not to take steps that might discourage home buyers, such as raising FHA minimum down payment requirements. Home Loan Wholesale published a report revealing that delinquencies on FHA mortgages were higher than originally anticipated. According to HLW, the FHA mortgage lenders that were surveyed said that “the higher mortgage premiums were hindering the market for first time home buyers.”

The White House submitted a budget plan to Congress this year that would have provided the FHA as much as $688 million from the U.S. Treasury, the first bailout in the agency’s seven decade history. The money was not needed because the FHA will get almost $1 billion from the government’s $26 billion settlement with the five biggest U.S. loan servicers over alleged foreclosure abuses, according to Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, which oversees the FHA. Mortgage servicers collect monthly payments and manage the foreclosure process. Read the original FHA audit article from Reuters.

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