Monday, November 19, 2012

The future of FHA

by Ethan Handelman, National Housing Conference

Last Friday, HUD released the annual actuarial report for the Federal Housing Administration (FHA). It shows the capital reserve ratio at –1.44% (that's a negative). FHA may not need any additional capital, depending on economic conditions and the results of policy actions in progress, but it might need an infusion from Treasury. Given that FHA is providing essential (and otherwise quite scarce) mortgage capital during an historic housing downturn, we should read this report as better news than we might have gotten. We should also be open to a conversation about structural changes to FHA that make it more flexible and better able to fulfill its essential role.

What does a negative capital reserve ratio mean? It’s a comparison of FHA’s current reserves of $30.1 billion set against $46.7 billion of expected losses on its current portfolio of single-family loans over the next 30 years. It excludes future income from new loans, which are performing far better than the 2007-2009 vintage that account for much of the losses. The full report also attempts to simulate some variation in economic conditions, but the future is as always difficult to predict.

FHA might need an infusion from the Treasury. It’s not necessary yet, and it may not be needed at all. The actuarial report doesn’t take into account income to the fund coming in from new loans originated, and since FHA continues to do a brisk business as private capital remains a much smaller part of the mortgage market, that’s real money. And if housing markets continue to improve, policy changes take effect, and loss mitigation efforts expand, losses may well be quite a bit less than anticipated.

Indeed, we should be impressed that FHA is in as good a shape as it is, given that we have experienced the worst housing downturn since the insurance program was created. FHA remains an essential source of mortgage capital, particularly for borrowers without the accumulated wealth for a large downpayment. With home mortgage lending still very tight from all sources, FHA is more important than ever for sustaining the nascent housing recovery and making sure that all in America have access to affordable homeownership options.

FHA has several actions in progress to shore up the financial position of the insurance fund, including foreclosure prevention policies, distressed note sales, and a small increase in premiums, detailed in HUD’s press release. These are good steps within the existing framework of the agency. The housing crisis provides us an opportunity to think beyond the immediate steps toward an FHA better able to respond to major housing challenges. Once the political hubbub around this actuarial report subsides, committed housing stakeholders should engage in real conversation about what FHA needs, such as the ability to scale its activity up and down, adjust pricing and loan terms, and manage its risk more efficiently. If this crisis provides an opportunity to make the agency better able to fulfill its role, some good may come of it.

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