The number of seriously delinquent FHA loans increased by 18.9% from last year to a record number of 711,082 mortgage loans. FHA loans classified as seriously delinquent amount to 9.6% of all FHA insured mortgages.
A seriously delinquent loan is defined by the FHA as loans that are in foreclosure, bankruptcy or 90 days or more delinquent. Statistically, once a loan reaches the “seriously delinquent” stage, the end result is foreclosure for the homeowner and huge losses for the FHA.
Making matters even worse, almost 1 out of every 8 FHA mortgages is 60 days or more past due. As of December 31, 2011, an incredible 17.8% of all FHA mortgages were 30 days or more delinquent. Any bank with this many loans in default would quickly be declared insolvent by regulators.
According to analyst Edward J. Pinto of the American Enterprise Institute (AEI), the FHA is deeply insolvent and hides this fact through lax accounting standards. Mr. Pinto notes that if the same standards were applied to the FHA as are applied to private institutions, regulators would be forced to shut it down.
One example of the fantasy land accounting used by the FHA, according to Mr. Pinto, relates to the FHA estimate on future housing prices. Falling home prices helped to put Fannie Mae and Freddie Mac into bankruptcy and are also causing huge losses at the FHA. The latest statistics on home prices show that values continue to drop and many analysts expect further declines. Yet the FHA is inexplicably forecasting that housing prices will rise by 4% per year over the next nine years! At the same time, as noted above, FHA delinquencies continue to explode upwards.
Nationwide, foreclose inventories remain near record levels and the regulatory imposed slowdown on foreclosures seems to be prolonging the housing crisis.
The dubious estimates of future home values allows the FHA to reduce loss expectations, giving the agency the appearance of solvency. The FHA insurance fund, which covers losses on borrower defaults, is already almost completely depleted. The capital ratio of the FHA insurance fund is only 0.12%, way below the Congressionally mandated level of 2.0%. As recently as 2006, the FHA insurance fund had a capital ratio of over 7%.
The AEI summed up the FHA’s situation as follows:
In other words, using private-sector regulatory accounting for mortgage insurers, the FHA would be deeply insolvent today and have an estimated total capital shortfall of $35 billion under the FHA’s current capital requirement—and nearly $20 billion more under the 4 percent PMI capital requirement. In addition, based on the deterioration between September and December’s results in its effective capital position, it would be experiencing a negative trend of about $15–20 billion per year. If it were a private mortgage insurer, the FHA’s fund would have been taken over by its regulator long ago.
The AEI also notes that FHA mortgages are high risk due to low downpayments and the approval of borrowers who have high debt to income ratios, often above 45%. The FHA, as the last government mortgage agency standing, was seen as the “savior” to the housing industry. Borrowers flocked to the FHA since it had the easiest underwriting standards in the industry. From a portfolio of only $350 billion loans in 2007, the amount of FHA insured loans has ballooned to over $1 trillion today. Making matters even worse, under intense pressure by lobbyists from the National Association of Realtors, Congress allowed the loan limits for FHA loans to remain at $729,750, a level that was supposed to decline under the Dodd-Frank legislation.
Recognizing the urgent need to take action to prevent a collapse of the FHA, the House Financial Services Committee approved the FHA Emergency Solvency Act. The legislation will try to shore up the FHA insurance reserves by establishing minimum annual mortgage insurance premiums, improving FHA internal controls and disclosures, banning unscrupulous lenders from participating in the FHA lending program and requiring that lenders who commit fraud be required to reimburse the FHA for losses.
Unless home prices bottom and begin to rapidly increase in price, the FHA Emergency Solvency Act has come too late and the FHA will soon join Fannie Mae and Freddie Mac in bankruptcy.