Propping Up The FHA

Another bailout to come?

With the most recent reports out about the potential insolvency of the Federal Housing Administration (FHA), a unit of the Department of Housing and Urban Development, real estate investor loans on 1-to-4 family residential properties are looking like some of the greatest bits of saving grace for the nationwide insurer of home loans.  

In an article in The New York Times from 12/2/12  (“In An FHA Checkup, A Startling Number,” by Gretchen Morgenson), it was reported that the FHA’s mortgage insurance fund, used to reimburse mortgage default losses by banks who underwrote FHA-backed mortgages, has dwindled significantly over the past year.  While last year the fund had $1.2 billion in its coffers, today that figure is down to minus $13.48 billion.  Yes, that’s right – a huge negative number to assimilate.

What went wrong?

But how is that possible?  And what does it mean for the average real estate investor?  Well, for starters, the negative figure only represents an estimate of the difference between future collections by the FHA (of mortgage insurance premiums) and the potential losses on mortgages they are obligated to make good on over time.  Using historical mortgage default data, their auditors can extrapolate future defaults, based on lending criteria in effect when loans were made.

Stringent lending standards

More recent loans (after 2010) with more stringent lending standards now built in mean there should be less defaults in the future.  However, loans backed by the FHA between 2007 and 2009 have been seeing high rates of defaults due to formerly lax lending standards.  And those defaults become the foreclosures of today – and tomorrow.  We already know that there is a long backlog of bank foreclosures ready to be rolled out over the next few years in the U.S.  And the FHA is on the hook to banks for accrued losses from these bad loans.  Hence, the projected $13.48 billion shortfall for the FHA – over time.

Real estate investor saviors

Property investors, as a group, can be seen as white knights for the FHA.  New standards allowing for FHA backing of non-owner occupied 1-to-4 family properties require much greater down payments (usually in the 25% to 40% range) by real estate investors than standard FHA-backed mortgages.  Those standard FHA backed mortgages to homeowners allow for as little as 3.5% down payments.  And while the FHA does not receive revenue from mortgage insurance premiums (typically created when down payments are less than 20%) on these real estate investor loans, there is much more security and low rates of default built into these new mortgages.

A bailout ahead?  Absolutely.

Overall though, look for some form of modest FHA bailout by the Treasury Department at some point in the next couple of years.  The U.S. government is not going to allow the FHA to become insolvent.  And look for more types of FHA-backed mortgage loan programs to come down the pike for property investors.  With their high down payments offering greater security, the FHA is developing a strong desire and attachment to befriend real estate investors for the sake of building up their own financial strength.  The need for more stability of the FHA is there, and property investors have been helping to prop up this lending industry behemoth.

 

 

photos courtesy of  jordansmuse.blogspot, bubbleinfo.com, ml-explode.com, chicagoagentmagazine.com, blog.amerifirst.com, realty.com