More news on Federal Housing Administration (FHA) mortgages from the Washington Post today. In an article written by Dina ElBoghdady we learn that FHA mortgages are doing better this year than was initially projected, but declining home values could potentially erase all the gains.
An audit of the FHA last year found that as the FHA insured more mortgage loans, its default rate increased and the cash reserves set aside to cover defaults were in danger of being totally depleted. This would be disastrous, as the FHA has become one of the main avenues for people with middling credit scores or little cash for a down payment to get a mortgage. If defaults continued to increase, the FHA could be in danger of becoming insolvent and would need to be bailed out by U.S. taxpayers.
This week the FHA released a report to Congress that showed that the FHA managed a net increase in cash reserves of $446 million. It appears that agency has done a good job lending to more qualified borrowers. The FHA ended up paying out 19,000 fewer insurance claims than projected, which equated to $3.7 billion less in payouts than projected by the audit.
The FHA may have exceeded expectations due to backlogs in processing foreclosures (in which case the improvement would largely be a mirage) or it could be due to foreclosure-prevention programs such as HAFA, HARP, and the like.
According to the article, the worst performing mortgages on FHA portfolios are those that were issued in 2007-8. As these loans go bad and are removed from the FHA’s books, FHA losses are expected to tail off.
There is a considerable amount of danger that if housing prices decline significantly, there could be a whole new round of foreclosures that would endanger the FHA. What happens will remain to be seen.
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