The quarterly report issued by the Office of the Comptroller of the Currency (OCC) shows the mortgage market finally stabilizing after a prolong slide nearly five years ago. Private mortgage lenders have 39% fewer homeowners delinquent with their mortgage payments. Furthermore, the rate of foreclosures has dropped by 10%.
On the federal side of the ledger, the delinquency rate of government- insured loans, mostly guaranteed by the Federal Housing Agency (FHA), increased 27% for the year ending March 31, 2012. The number of government foreclosures climbed 17%. However, Fannie Mae and Freddie Mac recorded a 15% percent decline in delinquencies and 6% dropped in the foreclosure rate.
FHA Modifications Down
Many homeowners who have FHA-insured mortgages and struggle to maintain their monthly payments, can apply for the FHA Home Affordable Modification Program. The program changes one of more terms of the loan to make monthly payment more affordable. According to OCC report, more than 48% of homeowners who received modified loans went back into default within a year after receiving a loan modification. In contrast, 36.2 % of all loan modifications ended up back in defaults.
FHA Loan Market
Many first-time homebuyers choose FHA-insured mortgages because the program helps homebuyers purchase a home with as little as three percent down payments. In addition, banks do not have as stringent underwriting criteria for credit and household income compared to conventional mortgages.
Lenders make lower cost mortgages available to homebuyers, including home improvement loans. The program caters to all homebuyers, with the only requirement that the borrower only has one FHA loan outstanding at a time.
FHA does not actually loan borrowers the money for a mortgage, but guarantees loans made by lenders to homebuyers.
Since the housing market took a noise dive in 2008, housing experts have lamented the FHA’s growing exposure to a significant portion of the home mortgage market. In the fourth quarter of 2006, FHA mortgage represented a 1.9 percent share of the market for single-family loan originations. After private lenders tighten credit underwriting requirements, which basically closed off private mortgage lending, FHA stepped in to fill the void.
By 2009, the percentage of FHA-insured loans had grown to 18.7%. Inside Mortgage Finance reports that FHA-guaranteed loans now accounts for 29% of all mortgages approved of home purchases during the first quarter of 2012.
Ed Pinto, a fellow from the American Enterprise Institute think tank categorized currents FHA mortgages as “very risky loans.” Pinto said FHA mortgages over the last three years have started to move into “the peak delinquency period and they are very big books of business."
A few years ago, an independent audit revealed FHA’s Capital Reserve Account and emergency reserves had reached dangerously low levels. Emergency reserves dropped to dropping to 0.53 percent – well below the two percent reserve fund ratio required by law. Since the release of the report, HUD management has made moves to grow the size of the account by raising private mortgage insurance premiums.
In addition, HUD raise credit score qualifications and require borrowers with credit scores below 580 to make larger down payments. Sellers can no longer assist buyers with down payments. The agency also holds lenders to a higher standard. Although the management team has increased loss reserves by $20 billion over the last three years, it has paid out $37 billion in claims to lenders during the same period. This doubles the amount of insurance claims paid in the previous three years. HUD maintains a razor-thin positive balance in the account.
According to one FHA official, policies put in place by management have started to take hold. A higher percentage of borrowers approved for FHA mortgages since 2009 have stronger credit profiles, which should lead to improved portfolio performance on new books. Nonetheless, FHA’s does not have sufficient financial protection with delinquencies and foreclosures on the rise, which is cause for concern with many housing industry analysts. At some point, the agency may require a bailout from taxpayers.
As long as the economy continues growing, FHA believes it will have reserves back at mandated levels by 2014. Some economists predict a longer period for FHA to fix it deficits.