Think Tank Measures FHA Progress

The American Enterprise Institute’s
(AEI) FHA Watch, a monthly on-line
publication tracking operations of the housing agency, just released its sixth
edition which makes clear the agenda of the conservative think tank.

Watch starts out by
quoting a Federal Reserve estimate that about one-third of the 11.1 million
underwater mortgages in the U.S. are FHA insured, a number which would account
for nearly half of FHA’s 7.4 million outstanding loans.  The Institute concludes that, since about 72
percent of outstanding FHA loans are of post 2009 vintage, about 1.5 million
recent loans must be underwater. 

“This comes as no surprise,” Watch
says, “since the FHA continues to combine minimal down payments (average of 4
percent) with slowly amortizing thirty-year loan terms. As a result, earned
homeowner equity (the combination of down payment and scheduled loan amortization)
amounts to less than 10 percent after four years, or about enough to sell a
home at the break-even point if home prices stay steady. However, prices have
declined nationally about 7 percent since mid-2009, with lower-priced homes
declining even more. When combined with borrowers’ low FICO scores and high
debt-to-income (DTI) ratios, the result is a continuation of the FHA’s
destructive lending-lending that has resulted in 20-25 percent of recent
borrowers facing a 10 percent or greater likelihood of foreclosure.”

In addition to the opening statement, Watch spotlights the following topics:

  • Insolvency: FHA’s Position Worsened in May, with an
    Estimated Current Net Worth of $22.11 Billion and a Capital Shortfall of $41-61
    Billion.
  • Delinquency: Total Delinquency Rate Increased in May to
    16.23 Percent Because of Increase in Both Thirty- and Sixty-Day Delinquencies;
    Serious Delinquency Rate Ticked Up to 9.43 Percent.
  • Underwater
    Loans: FHA Is Responsible for 1.5
    Million New Underwater Loans.
  • Best Price Execution:
    The Government Mortgage Complex’s Ginnie Brands Demonstrate Continued
    Pricing Dominance over Fannie Mae.
  • The Road Map to FHA Reform: Specific Steps to Reform and the Status
    of Each

The last category sets forth AEI’s goals
for program reform and fiscal reform, steps for accomplishing each, and a
report card on the progress made by FHA and Congress toward the goals.  AEI’s goals for Program Reform are:

  1. Stepping back from markets that the private
    sector can serve to gradually return to a “traditional”10 percent home purchase
    market share.
  2. Stop
    knowingly lending to people who cannot repay their loans.
  3. Help
    homeowners establish meaningful equity.
  4. Concentrate
    on homebuyers who truly need help purchasing their first home.

The only recent improvement acknowledged
by AEI in this area occurred in February with a proposed rule that limits
seller concessions to the greater of 3 percent of the loan or $6,000.  More than a dozen other steps have not been
acted on by the agency.

The Institute has set the following
goals for FHA to achieve in the area of fiscal reform:

  1. Utilize generally accepted accounting
    principles and set rigorous disclosure standards;
  2. Establish and maintain loan loss and unearned
    premium reserves;
  3. Establish and maintain a minimum capital
    requirement of 4 percent of amortized risk in force;
  4. Fund a countercyclical premium reserve.

AEI found that FHA had made a small
amount of progress in this area by requiring application of SEC disclosure
standards to the FHA’s insurance programs and funds and by taking steps toward
retaining an independent third party to conduct a safety and soundness review
under generally accepted accounting standards. 
There was no acceptable progress on the six remaining steps.

…(read more)

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