FHA Anticipates Policy Changes to Address Quality of Existing Portfolio

The Federal Housing Administration (FHA) expects to introduce new policy changes to the market around the end of January, 2010 said David Stevens, Assistant Secretary for Housing and FHA Commissioner in a letter sent to lenders and correspondents last week.

The policies under consideration are intended to address the quality of the existing portfolio, improve the performance of future books of business and will help to return the capital reserve to above the legislated 2 percent level.

“We cannot comment on implementation time lines until decisions have been reached on new policies or policy changes and the manner in which they will be introduced,” said Stevens.  “However, as part of our process of exploring policy options, we will reach out to many industry players to better understand operational impacts in order to best assess a fair implementation time line.”

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In November, an independent actuarial study found FHA’s capital reserves were well below the 2 percent required by law.

A separate independent study released the same day on FHA’s reverse mortgage program found the HECM portfolio was performing well.  

David Stevens Letter

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  • Is FHA going to ever learn? Stop lending to people who should not be homeowners. It is unfortunate to see the reverse mortgage program take the hit for the mismanagement of the FHA. Or increase the MIP homeowners pay who take out a 'forward' FHA loan if so many are going into default

  • Critic,

    I think it's pretty clear what John (and the FHA) is saying.

    “The policies under consideration are intended to address the quality of the existing portfolio, improve the performance of future books of business and will help to return the capital reserve to above the legislated 2 percent level.”

    While no one has specific information on this, it is pretty clear that the FHA will be making changes (more than likely negative ones) that will impact our industry. As John alluded to – possibly that means an increase in the MIP paid by borrowers..or maybe another PL factor decrease. Whatever it is, we can't assume that it will be good – recent actions taken (last PL decrease) by the FHA on this issue have shown us that pretty clearly.

    • ReverseGuy,

      I cannot believe that I am the optimist on this issue.

      Based on HUD's own internal calculations, reducing the PL factors will do little to reduce any losses for the cohort of HECMs to be endorsed during the fiscal year 2010. Besides loweing PL factors only impacts capital some distant time in the future. Reducing PL factors does not provide gains; it just lowers losses. HUD estimated that the Administration's positive credit subsidy should have been a negative. When PL factors are high, reducing them lowers losses but each reduction thereafter, has a definite diminishing returns effect.

      Only raising MIP will give an immediate boost to total capital. Even a $1,000 increase to each HECM will provide less than $120 million in increased capital. I really do not see HUD going to HECMs for additional MIP unless this President or Congress place undue pressure on HUD to take this unwarranted step. Of course, this President did barge into a private meeting of other nations to tell them to drop it, so your guess is as good as mine….

  • Bottom line: making higher risk loans in an effort to extend the priviledge of homeownership beyond those who are truly credit-worthy is an expensive proposition, and somebody's got to pay for it.

  • I've been given the impression by my managers that the next adjustment could happen on the “forward” side of the market. I've heard that they are likely to increase the down payment to 5% from 3.5%. Hopefully that corrects a large part of the problem and no further PL reductions are needed.

    • Matt,

      When it comes to lowering HECM budget deficits, lowering principal limits is the best weapon. As a means to raising capital quickly, it is a very poor means.

      To raise capital qucikly, one needs to raise it. The most effective way to do that is by increasing the MIP.

      Not being an alarmist, the way to do this effectively is by raising the MIP on forward mortgages.

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