FHA insurance reserve not a problem

November 30, 2009
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According to the latest data from the Federal Housing Administration, West Michigan had the nation’s 33rd highest single-family home mortgage default rate in 2009, as ranked by Metropolitan Statistical Areas.

The default rate for the MSA, defined as Grand Rapids, Muskegon and Holland, was 12.19 in the FHA’s September report. It was 9.32 the previous year. In both years, the default rate was higher for adjustable-rate mortgages than for those with a fixed rate. Four other MSAs in the state had a higher default rate than the local region. (See related chart.)

Mortgage defaults nationwide have shrunk the FHA’s mortgage-insurance reserve to its lowest level in history, as the cushion fell to $3.6 billion at the end of the last fiscal year Sept. 30.

The reserve is covering FHA-insured loans that now total $685 billion, according to the agency’s annual report, and leaves the account with a ratio of 0.53 percent in relation to the mortgage amount insured. Two years ago, the reserve ratio was 6.4 percent. Congress requires a 2 percent minimum ratio for the capital reserve.

But apparently dipping below the congressional-required minimum threshold isn’t as alarming as some make it out to be.

“The capital reserve is the account for surplus funds. These funds are in excess of funds that are reserved in the financing account for all projected losses over the next 30 years, assuming that the FHA were to shutdown today and get no more additional income,” said Lemar Wooley, of the Housing and Urban Development Office of Public Affairs, in an e-mail to the Business Journal.

Wooley said the reserve ratio is a measure of the funds in the reserve account divided by the total value of the mortgages the FHA has insured.

“That means that the 2 percent capital reserve ratio is a measure of the excess surplus funds compared to the total insurance in force, above and beyond the funds the FHA has already reserved and has in the separate financing account to pay potential claims over the next 30 years,” said Wooley.

“To be clear, this is very different from the private sector, which typically only reserves for one year’s worth of losses, compared to the FHA, which reserves for 30 years,” he added.

The agency’s single-family mortgage insurance comprises 92 percent of its total business, while insurance for multi-family housing and health care largely make up the 8 percent that remains. During FY09, the FHA insured 1.9 million loans. Of those loans, 781,789 were made to first-time homebuyers and 233,120 of those were made to minorities.

“FHA-insured mortgage loans now account for more than 30 percent of all new home purchases in the single-family market,” said Wooley.

As mortgage lenders know, the FHA plays a key role in the housing market. While the agency doesn’t make loans, it does insure the mortgages that lenders make. That insurance lowers a lender’s risk because if a borrower defaults on a mortgage, the FHA will pay the lender for the loan.

Some might think that the FHA’s record-low reserve would have an adverse affect on the housing market, as mortgage lenders might not make as many loans, knowing that the reserve ratio is hovering near zero. But that’s not the case.

Wooley said the status of the reserve “has no direct affect on the housing market.”

Louis Berra, director of the Grand Rapids HUD office, agreed. Berra said the FHA, just like the Federal Deposit Insurance Corp., can go to the U.S. Treasury and request funds when money is needed.

“Yes, we should have 2 percent. If we fall below 2 percent and there is a need for the Treasury to give us a loan, they will do so, because the full faith and credit of the federal government is behind the FHA mortgage insurance,” he said.

“So that should not impact you and I from being able to get an FHA-insured mortgage at all.”

The FHA has insured more than 37 million home mortgages since 1934. The agency has 5.2 million single-family home mortgages and 13,000 multifamily mortgages in its insurance portfolio today.

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