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Fitch Ratings: FHA loans in jeopardy

by Broderick Perkins

(8/21/2012) - Grab a Federal Housing Administration (FHA) loan while you can - or at least while they are still relatively cheap and easy to get.

Higher mortgage insurance premiums on certain loans and a $1 billion slice of the National Mortgage Settlement hasn't lifted the federal housing agency out of the red and things could get worse,

according to the latest study on the FHA's sagging health.

Global rating agency, Fitch Ratings is painting a gloomy picture for the federal agency that stepped up to help bail America out of the home loan crisis with mortgage insurance on loans made by FHA-approved lenders.

The agency's low and no-down payment loans virtually replaced toxic subprime loans that contributed to the housing bust and those subprime replacement loans aren't holding up very well.

FHA's capital reserves ratio was down to 0.24 percent at year's end, well off the 2 percent level mandated by Congress to protect against credit losses on FHA-insured loans.

The mortgage settlement was a $1 billion boost and the FHA improved its funding position by boosting mortgage insurance premiums on purchase loans.

However, to keep up the demand, the agency recently backpedaled on a stiff underwriting rule regarding consumer credit disputes, extended an anti-flipping waiver for the third time and lowered the cost of refinancing, while streamlining refinanced mortgages with looser underwriting rules.

Fitch says a taxpayer bailout isn't in the works for fiscal 2012, but a recent academic study reported FHA losses could eventually warrant just such a bailout - to the tune of $50 million.

Fitch said rapid growth in FHA-insured loans and the high delinquency rate are chipping away at the reserves and suggested, contrary to the FHA's projections, the agency isn't likely to restore the reserves to 2 percent by 2014.

How high is the delinquency rate?

Wells Fargo reported that 90-day past due delinquencies totaled $1.4 billion for non-guaranteed loans as of June 30. The figure for government-guaranteed loans, including both FHA and Veterans Administration (VA) was $20.4 billion, almost 20 times as much.

Fitch also reported, for eight of the largest U.S. banks with substantial portfolios of FHA-guaranteed loans on their books, combined 90-day past due delinquencies totaled $79.4 billion at June 30. Of that total, 83 percent, or $66.0 billion, represented government-guaranteed mortgages.

And it's not just about a majority share of bad loans. While delinquency rates for non-guaranteed loans are improving, FHA loan delinquencies are getting worse. Those low down payments don't give buyers much of an equity stake in their home. The lack of equity and underwater conditions don't give buyers a strong incentive to keep paying the mortgage if hard times hit.

Fitch says FHA gets some slack because bank earnings are up and commercial mortgages are performing well. Together, those trends allow banks to better manage losses, including those from FHA loans.

However, Congress likely will have no stomach for an FHA bailout in 2013 and without a quick change in delinquency rates and foreclosures, Fitch says "We expect the FHA to evaluate unconventional methods to boost reserves, potentially including a more aggressive stance vis a vis banks over full insurance coverage of defaulted mortgages."

The trend could force the FHA to look for opportunities to send some defaulted loans back to the banks if the agency's funding worsens and home prices don't move up fast enough.

That could limit the availability of the loans.

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