The FHA Emergency Fiscal Solvency Act aims to strengthen the fund, which insures all FHA loans including Home Equity Conversion Mortgages. An independent audit of the fund found in November revealed that its capital reserves were well below the mandated level of 2%.

“The FHA’s cash reserves are down to dangerous levels, and taxpayers cannot afford another Fannie- and Freddie-style bailout,” said Rep. Judy Biggert (R-Ill.). “This Administration needs to enforce stronger standards and create room for the private sector to replace taxpayers as the primary source of funding. The FHA is facing an urgent fiscal crisis, and this proposal gives HUD Secretary Donovan emergency tools to wind down the risk before it’s too late.”

The bill, which was approved by the Insurance, Housing and Community Opportunity Subcommittee Tuesday, establishes minimum annual premiums for mortgage insurance, bars unscrupulous lenders from participating in the program, requires repayment of losses to FHA by lenders who have committed fraud and improves the FHA’s internal financial controls, transparency and disclosure requirements.

The FHA insures more than $1 trillion in mortgages on more than 7 million loans.

Written by Elizabeth Ecker

Targeting fraud and lending violations, FHA issued a final rule on Wednesday that requires lenders in the administration’s Lender Insurance program to indemnify the Department of Housing and Urban Development for certain violations of that rule. The move finalizes a rule proposed in October 2010, and was announced this week by Acting FHA Commissioner Carol Galante, who said the new rule will “provide greater clarity regarding our expectations for our LI lending partners, as well as actions we will take to prevent losses when those standards are not met,”

When FHA ramps up its inspection of FHA loans, it will likely mean a higher cost of doing business under the program, says Phil Schulman, partner with international law firm K&L Gates.

“This is the first time HUD will actually have statutory and regulatory authority to require indemnification, so it will become more costly for lenders to have loans subject to greater scrutiny,” Schulman says.

Lenders have long been asked to indemnify informally, but now HUD has the authority to demand it. Whether it will begin this enforcement immediately following its February 24 start date or in the weeks and months following is uncertain, Schulman says, but the requirements will mean an adjustment on the part of lenders.

“I think there will be many more requests of LI lenders to explain why they made particular loans,” he says. “If the department determines they’re material and deficiency resulted in the loan being ineligible, they will require indemnification.”

For lenders large and small, the costs of doing business as HUD insured lenders stand to go up because of the increased accountability. Those costs, Schulman says, could ultimately lead to lenders moving away from endorsing the loans directly, and moving back toward a HUD review of each loan.

“If these [HUD] demands become too numerous and too excessive and costly, then lenders may give up their LI authoirty,” he says. “They may say, ‘Forget it. If we’re subject to this scrutiny, you can have your LI authority back.”

It could have an adverse reaction on FHA and the program.

“If that happens, HUD will have to hire extra people because they will have to review all loans individually,” Schulman says.

Written by Elizabeth Ecker

“This extension is intended to accelerate the resale of foreclosed properties in neighborhoods struggling to overcome the possible effects of abandonment and blight,” said Carol Galante, acting commissioner of FHA. “FHA remains a critical source of mortgage financing and stability and we must make every effort that to promote recovery in every responsible way we can.”

FHA typically prohibits insuring a mortgage on a home that is owned by the seller for less than 90 days, but the waiver allows for insurances on purchases owned for shorter periods of time.

The waiver is limited to forward mortgages, however, and does not cover the HECM for purchase program.

View the waiver.

Written by Elizabeth Ecker

“I certainly don’t want the FHA to ask Congress or the Treasury Department for a bailout, which I’m afraid could happen sooner rather than later,” Sen. Vitter said. “The FHA has been violating the congressionally mandated ratio of capital they must keep in their mortgage insurance fund since 2009. It is their responsibility to manage their funds responsibly and keep their books in order. There is no way FHA could operate like that if they were a private bank, and we need to hold them accountable.”

The Vitter FHA Reform Bill directs the FHA to raise its annual premiums and use all available methods to recapitalize the Mutual Mortgage Insurance (MMI) fund to its statutorily required 2% capital reserve ratio within two years. It also includes an assessment of penalties if the fund fails to maintain that ratio and prohibits secret bailouts of the FHA by the Treasury Department.

Along with a handful of other Republican senators, Vitter has opposed the appointment of Carol Galante to be commissioner of the FHA.

“The status quo is not good enough, which is why I encouraged my colleagues to oppose Ms. Galante’s nomination,” he said.

In November, an independent audit of the FHA’s MMI fund indicated its capital reserve ratio stands at 0.24%. While Acting Commissioner Galante stated at the time that the insurance fund has a bright future, she later stated that the FHA could be in danger of a bailout if home prices continue to decline in 2012 and beyond.

Department of Housing and Urban Development Secretary Shawn Donovan stated before Congress that the department would consider raising insurance premiums in an effort toward the fund’s health.

“FHA is constantly evaluating the appropriate level of premiums given the potential risks to the MMI Fund, and any action regarding premiums will be considered in the context of balancing access to credit in today’s economic environment with the need for added revenue generation to protect the Fund,” Donovan in written testimony that was submitted to the Committee members before a House Financial Services Committee meeting titled “Perspectives on the Health of the FHA Single-Family Insurance Fund/”

Written by Elizabeth Ecker

The original lawsuit, filed November 1, claimed that Allied FHA loans cost the government approximately $834 million in insurance claims. Allied’s suit against HUD asked for its lending privileges back, claiming that the suspension would amount to job losses in the hundreds as well as losses for borrowers already going through the FHA loan process with Allied.

“The potential destruction of plaintiffs’ business outweighs any harm that would be suffered by the government before the issues can be litigated,” wrote Judge Melinda Harmon in the U.S. District Court of Southern Texas on Tuesday.

The HUD suit alleges that Allied originated FHA home loans from unapproved branch offices in violation of FHA requirements and later covered up the violations through the submission of false information. Among the company’s violations, which included false certification, failure to ensure that its corporate entity paid the operating expenses of its FHA-approved branch offices and failure to implement a quality control plan in compliance with HUD/FHA, the company submitted false information about where its loans were originated.

The company originated 133 reverse mortgages in 2010 and has originated 66 reverse mortgage loans to date this year, according to data from ReverseBase.

Written by Elizabeth Ecker

“Our projections indicate that, as of the end of FY 2011, the HECM portion of the MMI fund has sufficient capital resources to meet its future liabilities and hence will not require support from the overall fund,” the report states. “Expected improvements in house price growth rates and recent increases in mortgage insurance premiums contribute to a steadily increasing economic value of the MMI HECM portfolio from FY 2011 through FY 2018.”

The total economic value of the HECMs in the fund is projected to increase from $1.36 billion in FY 2011 to $10.03 billion in FY 2018.

“The increase in premiums and the HECM Saver both positively impacted FHA’s finances,” said Carol Galante, acting FHA commissioner during a press call on Tuesday. “Also, given additional guidance to lenders on property insurance default we expect to have a positive impact on the fund.”

Galante also noted the pending financial assessment of borrowers that one lender began implementing this week and others are working to put into play.

“We are also looking at longer term guidance with the financial assessment of borrowers that will come into play down the road.”

For the overall MMI Fund, Galante said FHA is working off most of its losses, and that a recent Wall Street Journal article indicating FHA’s financial troubles “got it wrong.”

“The quality of FHA’s business continues to improve significantly,” she said.

Download the report at HUD.gov.

Written by Elizabeth Ecker

The report, the third in a series of “FHA Assessment Reports” pinpoints mortgage default criteria for FHA and determines that down payment and equity are only a small component of what’s necessary in determining future losses.

“Our analysis seeks to illuminate the factors that can greatly increase a loan’s risk of default,” said Robert Van Order, professor of Real Estate and chair of GW’s Center for Real Estate and Urban Analysis. “We have found that down payment alone is not the leading cause of default; nor are low down payment loans much riskier than other loans. However, a number of factors working together—poor credit score, a high ratio of debt-to-income and other variables, such as seller-funded assistance—can create a recipe for disaster.”

Looking at FHA lending criteria versus the private sector, the study finds that with FHA guidelines permitting a 95.5 loan-to-value ratio for an individual with a 580 FICO score and debt-to-income allowance of up to 48%, FHA loans in 2008-2009 have a more than 25% chance of default. The comparable private sector loan has a 2% chance.

“For FHA, it’s a simple matter of prudent underwriting,” said Van Order. “When a portfolio includes such a high volume of high risk mortgages to borrowers with significant debt loads and poor credit history, you’re either going to collapse from defaults or be forced to try to recover losses by chasing revenue from premium increases for new borrowers.”

View the report here.

Written by Elizabeth Ecker

Citing the work of a University of Pennsylvania real estate and finance professor, WSJ points out that FHA could face a $50 billion shortfall in the coming years. It has gone from backing 5% of new mortgages for home purchases in 2006 to about a third today.

Source: WSJ, FHA

According to the study, the losses will be spread over many years and are unlikely to bankrupt the agency this year or next, but “FHA‘s present state is precarious,” it states. “For the past two years, it has been in violation of its most important capital reserve regulation, under which it is supposed to hold sufficient reserves against unexpected future losses on its existing insurance-in-force.”

The combination of increasing leverage at the entity level and among homeowners being insured has made FHA a risky proposition for taxpayers, the study states.

Bloomberg News posed a similar question in July in a report titled “FHA May Be Next in Line for Huge Bailout.”

Read the Wall Street Journal article.

Written by Elizabeth Ecker