Think Tank Measures FHA Progress

by devteam June 26th, 2012 | Share

The American Enterprise Institute’srn(AEI) FHA Watch, a monthly on-linernpublication tracking operations of the housing agency, just released its sixthrnedition which makes clear the agenda of the conservative think tank. </p

FHA Watch starts out byrnquoting a Federal Reserve estimate that about one-third of the 11.1 millionrnunderwater mortgages in the U.S. are FHA insured, a number which would accountrnfor nearly half of FHA’s 7.4 million outstanding loans.  The Institute concludes that, since about 72rnpercent of outstanding FHA loans are of post 2009 vintage, about 1.5 millionrnrecent loans must be underwater.  </p

“This comes as no surprise,” Watch</isays, "since the FHA continues to combine minimal down payments (average of 4rnpercent) with slowly amortizing thirty-year loan terms. As a result, earnedrnhomeowner equity (the combination of down payment and scheduled loan amortization)rnamounts to less than 10 percent after four years, or about enough to sell arnhome at the break-even point if home prices stay steady. However, prices haverndeclined nationally about 7 percent since mid-2009, with lower-priced homesrndeclining even more. When combined with borrowers' low FICO scores and highrndebt-to-income (DTI) ratios, the result is a continuation of the FHA'srndestructive lending-lending that has resulted in 20-25 percent of recentrnborrowers facing a 10 percent or greater likelihood of foreclosure."</p

In addition to the opening statement, FHA Watch spotlights the following topics:</p<ul class="unIndentedList"<liInsolvency: FHA's Position Worsened in May, with anrnEstimated Current Net Worth of $22.11 Billion and a Capital Shortfall of $41-61rnBillion.</li<liDelinquency: Total Delinquency Rate Increased in May torn16.23 Percent Because of Increase in Both Thirty- and Sixty-Day Delinquencies;rnSerious Delinquency Rate Ticked Up to 9.43 Percent.</li<liUnderwaterrnLoans: FHA Is Responsible for 1.5rnMillion New Underwater Loans.</li<liBest Price Execution:rnThe Government Mortgage Complex's Ginnie Brands Demonstrate ContinuedrnPricing Dominance over Fannie Mae.</li<liThe Road Map to FHA Reform: Specific Steps to Reform and the Statusrnof Each</li</ul

The last category sets forth AEI’s goalsrnfor program reform and fiscal reform, steps for accomplishing each, and arnreport card on the progress made by FHA and Congress toward the goals.  AEI’s goals for Program Reform are: </p<ol

  • Stepping back from markets that the privaternsector can serve to gradually return to a “traditional”10 percent home purchasernmarket share.</li
  • Stoprnknowingly lending to people who cannot repay their loans.</li
  • Helprnhomeowners establish meaningful equity.</li
  • Concentraternon homebuyers who truly need help purchasing their first home. </li</ol

    The only recent improvement acknowledgedrnby AEI in this area occurred in February with a proposed rule that limitsrnseller concessions to the greater of 3 percent of the loan or $6,000.  More than a dozen other steps have not beenrnacted on by the agency.</p

    The Institute has set the followingrngoals for FHA to achieve in the area of fiscal reform:</p<ol

  • Utilize generally accepted accountingrnprinciples and set rigorous disclosure standards;</li
  • Establish and maintain loan loss and unearnedrnpremium reserves;</li
  • Establish and maintain a minimum capitalrnrequirement of 4 percent of amortized risk in force;</li
  • Fund a countercyclical premium reserve.</li</ol

    AEI found that FHA had made a smallrnamount of progress in this area by requiring application of SEC disclosurernstandards to the FHA’s insurance programs and funds and by taking steps towardrnretaining an independent third party to conduct a safety and soundness reviewrnunder generally accepted accounting standards. rnThere was no acceptable progress on the six remaining steps.

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  • About the Author


    Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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