American Enterprise Institute (AEI) housing expert Edward Pinto assess the key facts to explain the Federal Housing Administration’s (FHA) deteriorating situation.
Key Facts Include:
- DELINQUENCY: In October 2011 17.02% of FHA loans were at some stage of delinquency. Comparing October to September, FHA’s total delinquency were all higher (17.02% vs. 16.78%), 60-89 day (2.42% vs. 2.3%), and serious delinquency rates (9.05% vs. 8.77%).
- FUTURE PROBLEMS: The increase in the 60-89 day rate is a leading indicator of future claims problems. At 9.05%, the serious delinquency rate is now 0.8% higher than the 8.2% rate in June 2011 (Source: HUD Neighborhood Watch and FHA Outlook Reports). The June rate was used to prepare the recently released actuarial report. As a result, there were about 75,000 more seriously delinquent FHA loans in October compared to June.
- UNDERCAPITALIZED?: The Actuarial Study notes that FHA’s forward single-family program has total capital resources of $28.2 billion offset by $27 billion in negative cash flows on its outstanding business (Study, p. 25). This sounds reassuring; however a private company would be required to set aside this amount plus $13 billion more to cover expected losses from known 60+ day delinquent loans.
- HOW MUCH COULD THEY LOSE?: FHA is responsible for 100% of the losses on the loans it insures. As a result its loss severities are extremely high. In 2009 FHA experienced a 64% loss ratio (Study, p. E-2). In October FHA had over 836,000 loans 60+ days delinquent with an estimated total outstanding balance of $117 billion (October 2011 HUD Neighborhood Watch). FHA would incur losses of $41 billion if 55% of these loans eventually go to claim and losses average 64% (calculation based on private mortgage insurance company reserving practices). This is $1.5 billion more than a similar calculation made for September 2011.
- FALLING SHORT: FHA would need another $21 billion to meet its congressionally mandated 2% capital cushion.
Edward Pinto was a an executive vice president and chief credit officer for Fannie Mae. He has done groundbreaking research on the role of government housing policies in the lead-up to the financial crisis. Pinto is available for interviews and can be reached at email@example.com.
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