FHA Charts Recovery After Premium Cut

WASHINGTON — Department of Housing and Urban Development Secretary Julian Castro touted the Federal Housing Administration's recent improvement on Thursday, saying it was on a trajectory to hit its statutory capital minimum and had recently seen a "significant uptick in refinancings."

Speaking before the House Financial Services Committee, Castro said that recent actions by the FHA to reduce its mortgage insurance premiums had increased loan volume. Though he would not have concrete data until November, he said he was optimistic it would hit its 2% statutory capital threshold within two years.

"With the limited data we have, we believe we are on track," he told skeptical Republican lawmakers.

The Federal Housing Administration single-family program appears to be benefiting from an improving economy, falling delinquency rates and the recent premium reduction. The agency dropped its annual premium in January by 50 basis points, which has helped to boost originations and recapture rates. 

FHA loan endorsements jumped from 50,411 in February to 83,440 in March, according to the latest FHA data. That increase was largely driven by a spike in refinance activity. Purchase mortgage volume also rose 23% to 45,571 loans in March from a month earlier, with endorsements up 62% from a year earlier, according to the latest FHA Production Report.

Observers pointed to the lower annual premium, now at 85 basis points, which encouraged borrowers to refinance back into FHA-insured loans. The recapture rate hit 35% in March, up from 27% in February and 19% a month earlier.

"The higher loan volume and recapture rate is likely to cancel out any revenue decrease due to the premium reduction," said Brian Chappelle, a co-founder of Potomac Partners in Washington.

Castro has been criticized by Republican lawmakers for reducing premiums, raising concerns it would delay the recapitalization of the FHA's insurance fund. The fund is required by law to be at least 2%, but it is at 0.41% as of November of last year.

During the hearing, Rep. Randy Neugebauer, R-Texas, pressed Castro on the issue

"Are the revenues on track to reach that goal?" Neugebauer asked.

The Texas Republican also said he was disturbed that the FHA cannot provide a more recent figure for its insurance fund. But Castro noted that independent actuaries, not the FHA, calculate the capital reserve once a year, and he encouraged the lawmaker to change the law if he wanted a more up-to-date analysis.

"We will not get the official number on this until around Thanksgiving time frame, when that independent actuary gives us the report," Castro said.

He said that the FHA reduced its premium to make loans more affordable, but that it has not reduced its credit standards, ensuring continued credit quality.

"We still have historically a fairly average high credit score for FHA-insured loans of 677," Castro said.

The FHA is projected to endorse $124.5 billion in single-family loans in fiscal 2015 and $113 billion in fiscal 2016, based on the actuarial report released last November before the premium reduction.

But FHA is likely to top those estimates. The agency endorsed $72 billion in single-family loans during the first half of fiscal year 2015, which ended March 31.

The Obama administration's fiscal year 2016 budget estimates that the FHA will insure $204 billion during that time frame, which is nearly double that of the actuaries' estimate.

Meanwhile, serious delinquent loans topped out at 9.54% in October 2012, when 734,400 FHA-insured loans were 90 days for more past due. The seriously delinquent loan rate dropped to 6.42% as of March 31, 2015, equaling 493,600 loans.

Claims on defaulted loan are also dropping, another positive sign. During the first half of fiscal year 2015, the number of claims was off nearly 30%. The actuaries predicted 89,000 claims by March 31, but just 60,000 had been filed.