The Federal Housing Administration, which finances nearly 30 percent of all home purchases, has enough cash reserves on hand to weather any anticipated economic reversals in the near future short of a second severe recession or depression, according to an independent actuarial study of the agency released today.
However, under most scenarios the agency should be able to continue to fulfill its mission of facilitating the market’s recovery. The volume of FHA insurance guarantees has increased since 2008 as private sources of mortgage finance have retreated from the market. Nearly 80 percent of FHA’s purchase-loan borrowers in 2009 were first-time homebuyers. In the second quarter of 2009, nearly 50 percent of all first-time buyers in the entire housing market used FHA-insured loans.
The independent study found that FHA has sustained significant losses from loans made before 2009, when it allowed sellers to assist buyers make down payments. The agency has also tightened underwriting standards on streamlined refinances, increased oversight of lenders, and is considering additional prudent measures.
The quality of new loans insured by FHA has improved on several metrics including average borrower credit score; the average borrower FICO score today is 693 compared to 633 two years ago. Additionally, FHA insured more than 835,000 refinances in FY 2009 to lower interest rate loans, enabling borrowers to save an estimated total annual savings of $1.3 billion.
“FHA is playing a critical role in restoring health to the housing market by helping working families access mortgage finance when private capital is tight,” said HUD Secretary Donovan. “This is a temporary role which FHA has played in previous economic downturns. The Administration is committed to ensuring that the FHA steps back as private capital returns to the market. With this temporary increased role comes increased risk and responsibility. That’s why we are committed to closely monitoring market behavior patterns and economic risks so that we are prepared to enact reforms that ensure the FHA’s financial health moving forward.”
Robert Ryan has been hired as the agency’s new Chief Risk Officer, the first-ever in the FHA’s history. As Chief Risk Officer, Ryan will oversee the coordination of FHA’s efforts to concentrate risk management in a single division devoted solely to managing and mitigating risk to the FHA’s insurance fund – across all FHA programs.
As part of its efforts to manage risk, FHA is modeling more extreme scenarios than those used by the actuary, including scenarios showing the reserves going below zero. FHA is committed not only to understanding its risks, but also to developing policy responses appropriate to ad