In a surprise reversal, the delinquency rate on single-family mortgages insured by the Federal Housing Administration has fallen in each of the last three months amid record volume.
Stable housing prices and higher-quality loans are aiding the agency's recovery, though FHA Commissioner David Stevens cautioned that the mortgage market is still on federal life support.
"Let's be real — it's still a government-financed market," Stevens told a group of industry executives Monday at a Mortgage Bankers Association conference in New York. "We have a lot of work to do to get the capital markets back to a sustainable level."
Citing a study by Campbell Communications, a Washington research firm, Stevens also said the FHA backed more single-family mortgages than Fannie Mae and Freddie Mac purchased or guaranteed in the first quarter of this year.
The FHA is on track to guarantee 1.9 million loans this fiscal year, the same as in the one that ended Sept. 30, which was up from 1.1 million a year earlier.
For FHA to have so much volume "is a sign of a very sick market," Stevens said. "Unfortunately, I don't think that's going to be changing anytime soon."
These days FHA loans are nearly the only product lenders can offer borrowers who have little money for a down payment (and the Department of Veterans Affairs and the Department of Agriculture's Rural Housing Service serve only their respective niches). FHA lending now accounts for 30% of all residential mortgages written, up from 3% in 2006, said Brian Chappelle, a partner at the Washington consulting firm Potomac Partners and a former official with the Department of Housing and Urban Development.
In recent years higher volume and market share came at a stiff price: higher defaults and losses. An audit released in November showed that in the fiscal year that ended Sept. 30, the FHA's capital reserve ratio had fallen to 0.53%, well below the congressionally mandated minimum of 2%.
Since joining the FHA last year, Stevens has focused on weeding out poor-performing lenders and has shut down more than 1,100 (formerly) FHA-approved lenders.
In the previous decade, the highest number of lenders the FHA had ever cut off in one year was less than 30, he said.
In January the FHA announced four major policy changes to improve credit quality and bolster the agency's reserves.
It raised up-front mortgage insurance premiums by 50 basis points, to 2.25%, required higher down payments from borrowers with low credit scores, reduced home-seller concessions to 3% from 6% and increased enforcement actions against FHA lenders.
The FHA also has asked Congress for greater power to make lenders indemnify it for losses. Such actions have put the FHA on more solid footing, Stevens said.
The agency currently has $2 billion more capital than it did at the end of last year.
The MBA reported last week that the seasonally adjusted delinquency rate rose for every loan type in the first quarter — except for FHA loans, where the rate fell 48 basis points from a year earlier, to 13.15%
Perhaps the biggest change has been a dramatic drop in the number of FHA-insured loans with FICO scores below 620, which accounted for 37% of the FHA's book of business but had dropped to just 4% in the last year, Chappelle said.
"Lender tightening is stopping loans below 620, so they're getting a better-quality loan even though volume is still high," he said.
With higher-quality loans, lower defaults and higher premiums, the FHA could raise its capital ratio this fiscal year if house prices hold steady, Chappelle said. Last year's audit included a 6.5% projected decline in housing prices this year, which has not yet materialized, he said. "I think it's definitely plausible that FHA's fund could reach an economic value of $20 billion, which would put them over the 2% capital ratio," he said.
