Loan Modification

FHA Losses: Can This Be Right?

By Peter G. Miller

There’s been a lot of discussion regarding how the FHA mortgage program is performing and has performed, including some musings by Rob Aubrey, who sometimes comments on our site.

Rob says “I am glad to see the 3.5-5% down payment was knocked down.

“The reason the reserves are down is because during the sub prime boom, there weren?t many new FHA originations and many of the existing ones re-fi?ed and took cash out with a conventional.

So now that FHA has come roaring back there is an imbalance. For the government to raise the UPMIF from .55-1.55 is just another ?TAX? make no mistake about it.”

I have a different view, respectfully.

Market Share

There’s no doubt that FHA loan volume shrank during the toxic loan years — the period when anyone with a pulse and an inability to remember how much they earned the year before could get a loan. In Fiscal 2005, for example, the FHA mortgage program had a 4.08 market share. The percentage was 3.77 in FY 2006 and 4.12 in FY 2007.

If you think about, isn’t it great that FHA management did not go for more market share? The way to do that, of course, would be to lower down payment requirements to zero and reduce mortgage insurance costs. No doubt such efforts would be popular, but where do you think the FHA would be today?

In fact, the FHA has raised the down payment requirement from 3 to 3.5 percent and gotten rid of third-party foreclosure assistance plans. Nope, not popular choices but that’s what you have to do to maintain financial balance.

Reserve Levels

Rob writes and says “the reason the reserves are down is because during the sub prime boom, there weren?t many new FHA originations and many of the existing ones re-fi?ed and took cash out with a conventional.”

This turns logic on it’s head. The reason FHA reserves are down is because there are more claims, not because there were fewer loans. There are more claims because home values have been falling and unemployment levels have been rising, meaning that ALL mortgage insurance plans have faced more claims. Home values have been falling because too many people who once “qualified” for toxic financing now have loans where the mortgage balance is substantially greater than the value of the home and the payments are not affordable.

Truth is, the FHA never offered interest-only loans or option ARMs and never permitted new borrowers to apply for financing without verifying income and employment. If it did, it would no-doubt be lumped in with the more than 380 lenders who have disappeared since 2006.

Raising the mortgage insurance premium MIP is not a “tax” it’s what insurance companies do to offset claims. And the FHA, at the end of the day, is an insurance plan.

Full post as published by FHA Mortgage Guide on May 10, 2010 (boomark / email).