Today, FHA released its FY 2012 Actuarial Study for its main single-family insurance program confirming its economic value or capital position has turned negative by $13.5 billion. This represents a deterioration of $23 billion from last year’s projection for FY 2012. The projection for FY 2018 has a total of $79 billion in plus and minus adjustments netting out to a negative $17 billion compared to last year’s projection. Swings of this amount indicate that the model FHA uses to calculate its actuarial soundness, while improved over earlier versions, continues to provide projections that are highly uncertain.
Each year, the FHA gives Congress a negative report and then says not to worry, next year will be better. But in fact, each year it gets worse. FHA’s delinquencies continue to grow with one in six FHA loans delinquent 30-days or more. The longer it takes the FHA to return to a sound fiscal footing the greater the risk to the taxpayer.
The rules FHA uses would not pass muster for a private company. My analysis indicates that, today, under generally accepted accounting principles (GAAP), the FHA has a net worth of negative $25 billion.
1. Congress should require a safety and soundness review of FHA now: The House of Representatives, by a wide margin, passed an FHA reform bill in September that among other provisions required the Government Accountability Office to engage an independent third party to conduct a safety and soundness review of FHA under GAAP applicable to the private sector. We must know what the FHA’s true financial condition is. It is unacceptable for FHA to say once again, not to worry, next year things will get better. We cannot continue operating an agency with $1.1 trillion in obligations on rosy scenarios.
2. The FHA must bring a credible plan to the Congress on how to deal with its insolvency.
It should start by reducing its tolerance for failure and return to its traditional mission. It is a disservice to low- and moderate-income families and communities to continue making so many high risk loans. The best way to do that is to reduce the risk layering combining (low FICO, low down payment, high debt ratios and/or slowly amortizing 30 year term) on its high risk mortgages.
The secretary of HUD should immediately announce that to protect families and communities from abusive lending practices, it will not knowingly insure a loan for any family where the expected foreclosure rate, based on that family’s credit attributes, is 10% or more.
- Borrowers taking out high risk loans should be offered either a loan with a minimal down payment or a slowly amortizing 30 year term, but not both. This only makes sense with home prices at their lowest in 10 years and interest rates at their lowest in generations.
Taking these steps would put the FHA on the road to replacing irresponsible lending with responsible lending.