New foreclosure and delinquency data is casting shadows on the FHA's finances.
Another round of foreclosures and delinquencies has once again put the FHA’s finances under scrutiny, as the agency’s boom-era loans continue to haunt its books.
According to the latest data from Lender Processing Services, lenders began foreclosure proceedings on 36,400 FHA-backed mortgages in April, which is twice the number from a year ago, according to a Bloomberg report on the agency’s loans.
Delinquencies have not fare much better, but the year of origination plays a huge role in the performance of the loans. As of March, 26 percent of the FHA’s loans from 2007 are seriously delinquent, but for 2008, the total is 24 percent; for 2009, it’s 11 percent; for 2010, it’s 4.1 percent; and for 2011, it’s just 1 percent.
Recent policy tweaks by the FHA have played a big part in that diminishment. In 2010, the agency raised it minimum credit score to 580, along with rising its minimum down payment from 3 to 3.5 percent and limiting seller assistance for down payments from 6 to 3 percent. Then, most notably, it raised its insurance premiums by 75 percent and considered a credit requirement restriction that proved so controversial it all but abandoned the proposal.
Even with those changes, some are still critical of the agency’s relatively low-cost loan offerings. David Lykken, a managing partner at Mortgage Banking Solutions, an Austin, Texas-based consulting firm, was quoted by Bloomberg expressing such a perspective.
“The credit standards are way too loose – you can get into a house with very little skin in the game, and if home prices drop by a small amount, you’re underwater,” he said. “We’ve got to start getting reasonable about standards. What they’ve done so far, some very slight attempts at tightening, don’t really count.”
Modifications have proved semi-successful at stopping the tide of defaults. A study by the Treasury Department found that 49 percent of the FHA’s modified loans were delinquent again after 12 months, and an FHA report from September 2011 stated that 638,000 of its mortgages were in their second default.
As Bloomberg notes, the downward trend in home prices, along with the FHA’s growing influence in the mortgage industry, have contributed to the large numbers. In 2010, the FHA guaranteed 1.1 million single-family loans, its highest total ever and four times the total of its 2007 loans, which was 261,165. Since then, though, home values have depreciated dramatically in some spots of the country, and overall, FHA borrowers now owe nearly 7 percent more than their home is worth if they paid the minimum down payment.
All of the data, inevitably, leads to the FHA’s finances, and whether the agency will be able to weather the delinquency storm that has affected so many other lending institutions. By law, the FHA must maintain a 2 percent capital ratio, but its reserve fund had dropped to 0.24 percent in the FHA’s November report to Congress, a number that opened to the door to numerous doomsday scenarios from analysts.
The FHA has maintained its solvency, and other analysts have viewed the agency’s finances with a bit more restraint. And, the agency received a mammoth, $1 billion cash infusion from the nation’s largest banks as part of the mortgage settlement, and just yesterday, Deutsche Bank agreed to a $202.3 million settlement with the agency.