In an F.H.A. Checkup, a Startling Number
The New York Times
By: Gretchen Morgenson
December 1, 2012
Do we have another Fannie or Freddie on our hands -- another mortgage giant headed for a rescue?
Like Fannie Mae and Freddie Mac before it, the Federal Housing Administration is suffering in a mortgage hell of its own making. F.H.A. officials say they won't need taxpayers' help, but we've heard that kind of line before.
The F.H.A. backs $1.1 trillion of American mortgages and, by the look of things, it's in deep trouble. Last year, its mortgage insurance fund was valued at $1.2 billion. Today that fund is valued at negative $13.48 billion.
Granted, that figure, reported by F.H.A.'s auditor, doesn't represent actual losses. It's an estimate of the difference between future mortgage insurance premiums that the F.H.A. will collect and the expected losses on the mortgages that the agency is obligated to cover over time, combined with the agency's existing capital resources.
But the upshot is this: If the F.H.A. were to stop insuring new home loans today, it wouldn't have the money it needs to cover its expected losses in the coming years.
The F.H.A., a unit of the Department of Housing and Urban Development, is not about to stop insuring mortgages. Its officials say that without the F.H.A., people would have a tougher time getting home loans, and the housing market would suffer. (The F.H.A. insures loans of up to $729,750 in certain areas and requires down payments as low as 3.5 percent.)
But the sharp decline in the fund's value is a stark reminder that the mortgage mess is still very much with us, even as the real estate market seems to be recovering. In November 2011, for example, the F.H.A.'s auditor projected that the fund's value would climb to $9.5 billion this year.
The agency acknowledged that its financial position is a hostage to insured loans that still have "significant foreclosure and claim activity yet to occur."
Whether the F.H.A. will have to turn to the Treasury for help, of course, remains to be seen. That step would be determined by assumptions used in the Obama administration's 2014 budget proposal, due early next year, and not the auditor's report.
But neither the F.H.A. nor its auditor has a great record when it comes to forecasting. Its current woes, F.H.A. officials say, stem largely from toxic loans that it insured between 2007 and 2009.
Loans insured since 2010 are performing well, according to the agency. The main reason is that it is essentially catering to a better class of homeowner. In 2008, a quarter of all the loans it insured were made to borrowers with credit scores below 600. (A score of 850 is the highest possible.) In 2010, that figure was 2 percent.
IN an interview on Friday, Carol J. Galante, the acting commissioner of the F.H.A., said that initial data from recent loans, like that for early payment defaults, is showing far superior results over older loans. "We see dramatic improvement that gives us some level of confidence that they are certainly performing much, much better than the older books of business," she said. Ms. Galante added that higher credit scores also pointed to fewer losses on newer loans.
That may not last. Mortgage experts say it takes three to five years for loans to "season" and for reliable loss patterns to emerge.
Even Barry L. Dennis, the president of Integrated Financial Engineering, the F.H.A.'s auditor, says it is too soon to say with certainty how the recent loans will perform.
"So far, the delinquency statistics on those books are very encouraging," he said. "But we haven't gone long enough for the default statistics to prove that those books are better."
The F.H.A. also predicts that the years ahead will bring fewer losses because the larger loans that it began insuring in 2008 are better performers. The agency insures loans of up to $729,750, well above the $417,000 cap on mortgages guaranteed or bought by Fannie Mae and Freddie Mac.
Whether these loans continue to perform well is another question, given that many are not yet seasoned.
"Our equations assign less risk to a larger loan," Mr. Dennis said in an interview last week. "But that's not to say across the board that larger loans are less risky, everything else constant."
In addition, the F.H.A.'s limited experience with high-balance loans means that it has little data with which it can project losses accurately. Ms. Galante conceded this point, but added that recent increases in premiums levied on borrowers would help offset future losses at her agency. Initial fees rose this year to 1.75 percent of a loan balance, from 1 percent, while ongoing premiums are also going up.
A big question is whether the F.H.A.'s prehistoric technology undermines the accuracy of its data. In 2009, an independent auditor's report found significant deficiencies in the agency's aging information systems. Three years later, the agency is still trying to migrate from its creaky Computerized Home Underwriting Management System to a more modern one.
For example, the agency's system cannot spit out an accurate history of modifications on the loans it insures. As a result, these histories have to be recorded manually.
"The systems are old and antiquated and are in the process of being updated," Ms. Galante said. "But in terms of the underlying analytics of the performance of the portfolio, that's not an element of concern."
The F.H.A. is anticipating a better 2013 for itself and -- who knows? -- it may be right. But then, Fannie Mae and Freddie Mac played down their troubles for years, and we know how that ended.
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