Much wringing of hands and tearing of flesh has occurred over the last few years over government-backed loans, particularly FHA loans. Some would have the government completely back out of the mortgage market, and let the free market take over the risk of making mortgages.
Since the government now backs – in one form or another – more than 95% of the mortgages written in the United States, others would oppose such a move, including the National Association of Realtors (NAR), easily one of the most powerful lobbies in the U.S.
FHA loans – loans insured by the Federal Housing Administration, a department of Housing and Urban Development (HUD) – are an interesting case. FHA insures loans that otherwise no lender would make; they are meant for folks who either have less of a down payment than that required by conventional lenders, or who have bruised credit that make them ineligible for Fannie Mae / Freddie Mac loans. In other words, FHA backs, though its insurance, the new sub-prime mortgage, and FHA loans have been almost the only source for them since about 2009.
We would expect, therefore, that the FHA might have some…ahem…profitability issues. As it turns out, that would be right – sort of.
From 2009 through 2013 FHA drew down its reserves for losses, and in 2013 took its first-ever taxpayer “bailout” to the tune of $1.7 billion. Most of these losses stemmed from loans made prior to the financial crisis. 36% of FHA-insured loans made in 2007, for example, at one point or another were at least 90 days delinquent.1 By contrast, however, FHA loans made in 2011-2012 are defaulting at a rate under 5%.
Now, according to a Wall Street Journal report (based on the FHA’s annual report to Congress) the FHA is back in the black for the first time since 2011. This refers to the FHA Capital Reserve Ratio, essentially a sinking fund for payout on loan losses.
Joe Light at the WSJ writes in Federal Housing Authority in the Black for First Time Since 2011
“The audit found that the FHA’s insurance fund had an economic value of $4.8 billion at the end of September, up from negative $1.1 billion last fiscal year. Its capital-reserve ratio, which the FHA is supposed to keep above 2%, grew to 0.41%. While an improvement, it was still short of last year’s projection.
More important, the report estimated that the FHA won’t return to the congressionally mandated 2% threshold until 2016, a year later than formerly estimated.
Recent FHA loans have performed very well, and the better performance combined with higher fees has led to the improvement.”3
The reversal in the direction of growth in the reserves can be attributed to better underwriting, an improving economy, and higher fees and insurance premiums to home buyers.
While it may not seem impressive that the reserve fund is only 0.41% of insured liability (when 2% is the target) keep in mind that FHA-insured loans are a huge part of the first-time home buyer market, so the insured liability is growing rapidly. As reserves build, they are chasing a growing liability.
Fannie Mae and Freddie Mac have been very profitable for a couple of years now, and now we find FHA has turned the corner, stemmed losses, is profitable, and appears to be well on its way to financial stability.
Is this one more road sign that the housing recovery is solid?