Think Tank Measures FHA Progress

By: Jann Swanson •

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.

FHA 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, FHA 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.