How Risky is the FHA’s Low Down Payment Program?

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How Risky is the FHA’s Low Down Payment Program?

  1. 1. How Risky is the FHA’s Low Down Payment Program?<br />NAR Research<br />January, 2011<br />
  2. 2. Impetus<br />FHA is required by law to have 2.0% capital reserve ratio<br />Defaults pushed the capital reserve ratio to 0.5% on September 30th of 2010, down from 0.53% a year earlier<br />A sharp price decline might push some low-down-payment borrowers underwater<br />Concern that the government might be forced to support FHA if FHA’s capital reserves are erased<br />
  3. 3. Reason for Concern: 75% increase in high-LTV share since 2007<br />The elimination of seller assistance does not fully explain this increase<br />Source: FHA<br />
  4. 4. FHA and the Subprime Market<br />Historically, the FHA has focused on extending credit to the lower end of the credit spectrum<br />Foreclosure rates on high-LTV, FHA mortgages have increased, but stood at roughly a quarter of the rate for subprime and Alt-A loans as of the 3rd quarter, 2010<br />FHA is more experienced at vetting high risk borrowers than the private sector.<br />In recent years, FHA benefited from borrowers with better credit as its market share expanded<br />
  5. 5. FHA Loans Outperform Private Sector Products for Borrowers with Poor Credit<br />Source: CoreLogic<br />
  6. 6. Credit Scores Have Improved Since 2007<br />58% of FHA borrowers had a FICO>720 in Q3 2010 versus 19.5% in Q3 2007<br />Source: FHA<br />
  7. 7. FHA Now Competes with Prime Loans<br />The foreclosure rate on high-LTV, FHA purchase loans was lower than that for high-LTV, prime mortgages for the past 12 consecutive quarters<br />The foreclosure rate on high-LTV, FHA purchase loans eased in the 2nd quarter of 2010<br />The “buyers’ market” and credit crunch allowed borrowers with strong credit to access FHA’s low rates on high LTV loans in greater numbers, which increased the credit quality for FHA’s high LTV loans<br />
  8. 8. High LTV, FHA Outperformed Prime<br />Source: CoreLogic<br />
  9. 9. High LTV Best Performing FHA Product<br />High LTV loans now outperform both low- and moderate-LTV, FHA products <br />The foreclosure rates on all LTV groups increased with the end of moratorium in the 1st quarter 2009<br />Jump in 1st quarter 2009 low-LTV loans was concentrated in the 75% to 80% LTV cohort<br />Suggests that borrowers who utilize the 3.5% down payment are the least risky to FHA<br />
  10. 10. High-LTV, FHA Mortgages Have the Lowest Foreclosure Rate of all FHA Products<br />Source: CoreLogic<br />
  11. 11. High FICO Preferred High-LTV, FHA Products in the FHA’s Older Book<br /><ul><li>Best FICO concentrated in high-LTV loans
  12. 12. Low FICO concentrated in higher proportion in lower LTVs and SFDPA</li></ul>Source: FHA<br />
  13. 13. Credit Quality Improved; Majority of FHA’s Total Book is Now High-FICO, High-LTV<br /><ul><li>High FICO share improved in all LTV ranges
  14. 14. 83.9% of high LTV had a FICO greater than 639
  15. 15. 58.7% of the FHA total lending was for high LTV loans with a FICO greater than 639 in 2010 versus 24.4% in 2007</li></ul>Source: FHA<br />
  16. 16. Housing Without high LTV FHA Loans<br />5.156 million existing home sales in CY 2009<br />12.0% or 618,070 were FHA loans with LTV between 96% and 98%<br />Implies a 12.6% decline in median home price if high LTV eliminated<br />Share of FHA loans with 96% to 98% LTVs rose from 58.1% in 2009 to an average of 68.7% for Q1 through Q3 of 2010<br />Impact of eliminating high LTV, FHA in 2010 would be greater than 12.0% of EHS in 2010 (roughly 15.0% for Q1 through Q3)<br />Loss of high LTV from the FHA’s portfolio would have dropped $5.67b from the FHA’s economic value in FY 2010 and forced the FHA to borrow $2.029b from the government<br />
  17. 17. Other Sources of the Strain on FHA<br />Risk from borrowers with lower credit magnified by economic decline<br />Shift in focus of FHA lending<br />HAMP<br />Lend to broader market<br />Seller assisted down payment program<br />Expanded lending:<br />mitigates improved books?<br />raises risk to tax payers?<br />
  18. 18. Employment Issues Account for Nearly 50% of Delinquencies<br /><ul><li>Excess obligation was primary issues in 2007
  19. 19. Income and unemployment primary reason after 2008
  20. 20. Income falling as a reason for delinquency as of Q3 2010</li></ul>No source of private sector data to use for comparison<br />Source: FHA<br />
  21. 21. Expanded Role for FHA in the Housing Market?<br />Foreclosure rate on FHA refinance loans jumps in the 3rd quarter of 2009 after new initiative <br />FHA-HAMP – August 2009<br />Allows underwater borrowers to refinance into FHA loans<br />Defers up to 30% of remaining principal<br />Pays up to 12-months of arrearage<br />Reduces PITI to 31%<br />Foreclosure rate on FHA REFIs surpassed purchase in the 4th quarter of 2009<br />FHA endorsed 871,096 refinances in calendar year 2009<br />The spread widened in the 1st through 3rd quarters of 2010, but FHA’s REFI volume fell dramatically<br />
  22. 22. Foreclosure Rate on High LTV, FHA REFI Loans Above the Rate on Purchase<br />Source: CoreLogic<br />
  23. 23. Legacy of Seller-Funded Down Payment Assistance<br /><ul><li>Nearly 500,000 loans from SFDPA still on FHA books; 145,000 more were refinanced into new FHA loans
  24. 24. Account for 17% of total FHA loans
  25. 25. 34% of SFDPA loans on books are in delinquency; 12% of refinanced SFDPA loans in delinquency
  26. 26. SFDPA loans accounted for $6.1 billion in losses to date: FHA anticipates $7.5 billion in losses in FY 2011 and FY 2012
  27. 27. Excluding these losses implies a reserve ratio of 1.67% in 2011 versus the FHA’s current projection of 0.99%</li></li></ul><li>Does the Expansion of FHA Hide Improvements or Expand Risk to Tax Payers?<br /><ul><li>ENW increased from $3.641b in FY 2009 to $4.657b in 2010, an increase of 28%
  28. 28. IF rose 36% over the same period
  29. 29. FHA’s review suggests that strong credit in the expanded 2009 and 2010 books added to ENW and offset lower credit quality in older vintages
  30. 30. Furthermore, the total number of loans rose (and potential claims), but average loan risk for the portfolio fell and newer vintages are paying</li></ul>Source: FHA<br />
  31. 31. Source: FHA<br />

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