August 12th, 2010 5:10 PM by Lehel S.
Mortgages backed by the Federal Housing Administration have performed better than expected so far this fiscal year, though the improvements could be overturned if home prices sink, according to a report the agency submitted to Congress this week.
The report analyzed the FHA's loan portfolio from October through June and compared the results to the projections in an independent audit released late last year.
That audit found that as the FHA's loan volume expanded, its default rate rose and the excess cash it set aside to deal with unexpected losses eroded to dangerously low levels as of Sept. 30. The auditors concluded taxpayers would be on the hook for losses if worst-case scenarios played out -- a first for the agency, which has always used fees it charges borrowers to pay lenders for losses.
In its report to Congress this week, the FHA updated lawmakers on the performance of its loans since the audit's release. The agency said it collected more money than it disbursed in the nine months ended June 30, for a net increase of $446 million. It concluded that FHA loans are holding up better than the audit had predicted on many fronts, in part because the agency has attracted more creditworthy borrowers and rooted out fraudulent lenders.
But the report did not update the excess cash reserves calculated in last year's audit. Those were about $3.6 billion as of Sept. 30. That represented about 0.53 percent of all outstanding single-family home loans insured by the agency -- well below the 2 percent required by law. A new audit is due later this year.
The FHA's report to Congress said that from October through June, the FHA had 19,310 fewer insurance claims on loans gone bad and paid $3.7 billion less than projected by the audit.
Some states are experiencing a backlog in processing foreclosures, which may help explain the lower-than-expected claims, the report said. But aggressive foreclosure prevention efforts and stabilizing home prices also contributed to the better results.
When home values drop and borrowers end up owing more than their homes are worth, they are vulnerable to foreclosure because they can't sell their properties or refinance if they face a financial setback.
But just as better-than-predicted home prices have helped the FHA so far this fiscal year, a sustained drop in prices could severely damage its finances going forward.
"That's the overarching caution," said Bob Ryan, the agency's chief risk officer. "We have to think about what loan performance will look like based on what houses' prices will be doing going forward."
The most at-risk loans are the ones made in 2007 and 2008, the report said. FHA Commissioner David H. Stevens has told Congress that "rogue players" migrated to FHA lending in those years and used aggressive tactics to attract poor-quality borrowers to the FHA.
Those loans are now maturing into their worst years because failures most often occur two to three years after a mortgage is made. As the loans go bad and clear off the FHA's books, the agency expects its losses to taper off. The 2009 and 2010 loans -- which now make up 60 percent of its outstanding dollar balances -- are of better quality, which is why the delinquency rates on those loans are low, the report said.
In the quarter ended June 30, only 0.42 percent of the FHA purchase loans were at least 90 days late within their first six months. By contrast, 2.6 percent of the mortgages in the comparable quarter of 2007 and 1.5 percent of the loans in the same portion of 2008 were seriously late.
The report also said that the FHA has endorsed more than 1.3 million single-family loans in the first three quarters of the fiscal year as of June, and it's on pace to ensure 1.7 million by the end of the fiscal year on Sept. 30. Home purchase mortgages alone may surpass the one million mark for the first time since 1987. But refinance activity has slowed dramatically since its peak in late 2009.