Tuesday, November 15, 2011

HUD report on FHA Financial Status

by Calculated Risk on 11/15/2011 10:04:00 AM

This report shows some improvement from the report last year, but the house price assumptions seem optimistic.

From HUD: FHA Issues Annual Financial Status Report to Congress

In reporting on findings of the annual independent actuarial study, HUD indicates that, in the midst of continued weakness in housing markets across the county, the MMI Fund capital ratio remains positive this year at 0.24 percent. With new risk controls and premiums put in place by the Obama Administration, the independent actuaries predict the Fund will return to the Congressionally-mandated threshold of two percent capital more quickly than was projected by last year’s review.
As was the case last year, the new actuarial study shows that FHA is expected to sustain significant losses from loans insured prior to 2009, and thus its capital reserve remains below the congressionally mandated threshold of two percent of total insurance-in-force. However, the actuaries’ report concludes that, barring a further significant downturn in home prices, the MMI Fund will start to rebuild capital in 2012, and return to a level of two percent by 2014 – outpacing last year’s prediction.
Losses on loans insured through the first quarter of fiscal year 2009 continue to place a significant strain on the Fund and are expected to reach $26 billion within a few more years. Though they were prohibited in 2009, the ongoing effect of so-called “seller-funded downpayment assistance loans” is still significant. The net expected cost of those loans, as projected by the independent actuaries, grew by $1.8 billion over the past year to $14.1 billion. Conversely, the actuaries found that the FY2010 and FY2011 books are expected to be very profitable, providing significant net revenues to offset losses on earlier books.
Long term readers will remember the many posts by Tanta and myself warning about the negative impact of "DAPs" (the seller-funded downpayment assistance programs that allowed buyers to put no money down). The DAPs were finally banned, but they caused significant losses for the FHA.

This assumes prices increase slightly next year: "The base-case scenario provided by Moody’s Analytics indicates price declines in 2011 of 5.6% and predicts a small amount of growth in prices in 2012 (1.3%), followed by ore steady growth starting in 2013."

Here is the HUD report - and the graph below shows the house price scenarios included in the report.

FHA House Price Scenarios Click on graph for larger image.

NOTE: Prices are for the FHFA index (GSE loans only), and the FHFA index didn't increase as rapidly as Case-Shiller, and didn't decline as fast either (the GSE loans have performed significantly better than the Wall Street originate-to-distribute loans).
The “Mild Second Recession” utilized by the actuaries poses an additional 9 percent decline in home prices beyond the 5.6 percent base-case decline, for a total two-year decline of 14.6 percent.

FHA estimates that the fund could withstand an additional decline in house prices of 4% beyond the base-case decline without experiencing a negative capital situation.
I don't think we will see another sharp decline in house prices - although I think prices will fall to new post-bubble lows this winter. I also don't think we will see the steady increase in prices as shown by all of these forecasts. Usually prices move sideways for a few years at the end of a housing bust (especially in real terms).

Special note: Tanta's birthday was November 15th. Tanta vive!