by David Hogberg
Skyrocketing growth in loans from the Federal Housing Administration and Ginnie Mae have helped support the mortgage market -- but could leave taxpayers on the hook for massive new losses.
FHA-insured loans have more than tripled from 530,000 in fiscal year 2007 to 1.7 million thus far in 2009. The Government National Mortgage Association, which securitizes FHA loans, has boosted its mortgage-related issuance to $287 billion from $85 billion.
Yet during that same period, the FHA's loan delinquency rate has climbed to 14.4% in Q2 from 12.6% two years earlier.
Adding to the concern, the FHA's fund to cover losses has dropped to a projected 3% of insured loans. That's a leverage ratio of 33-to-1, the level banking giant Bear Stearns was at before it failed.
The government's own watchdogs have rung the alarm that the FHA is increasingly vulnerable to fraud.
"One of the ways to read the FHA growth is that they are coming back to a more historically ordinary presence in the market," said Alex Pollock, a resident scholar at the American Enterprise Institute and former president of the Federal Home Loan Bank of Chicago. "But they're having very rapid growth and they have high loan-to-value ratios and one can certainly imagine scenarios where the delinquencies and losses get serious."
FHA-backed loans have down payments as low as 3.5% -- even as many private lenders have returned to 10% or 20%. Higher loan-to-home value ratios tend to have more risk. FHA borrowers often have poor credit ratings.
But FHA's delinquencies are still far lower than subprime loans, which have nearly doubled in the past two years to 25.4%.
Traditionally, FHA loans have been safer than subprime. Getting an FHA loan has been more cumbersome. Such loans also had various size limits -- now loosened -- that kept them out of many overheated housing markets that later crashed.
Also, the FHA encourages the banks it works with to help borrowers stay in their homes.
"Historically, a significant number of FHA mortgages cured themselves -- borrowers start making the payments down the road," added Guy Cecala, CEO and publisher of Inside Mortgage Finance Publications.
But Cecala also noted that those tend to reflect better economic conditions than today. Unemployment, a big factor in delinquencies, now stands at 9.4%.
The collapse of the private mortgage market has meant more business for FHA.
Congress has also pushed the FHA to get more involved by authorizing the $300 billion "Hope for Homeowners" program, intended to help struggling homeowners to refinance -- even when they are up to 25% underwater on their homes. Such reworked mortgages have an extremely high failure rate. However, FHA says it has not made many "Hope" loans.
Lawmakers also expanded the FHA loan limit from $625,500 to $729,750.
All that may be leading the FHA into riskier territory. And since the agency enjoys the full faith and credit of the U.S. government, the taxpayer would end picking up yet another tab for any future losses.
Also, the torrid growth may be masking the size of FHA's current delinquencies.
"Those numbers look lower than they would otherwise because the portfolio is growing fast," warned Pollock. "As a loan portfolio grows fast, the delinquency numbers look better because you're adding all these new loans that haven't had time to go bad yet into the denominator."
Without those new loans, FHA's Q2 new foreclosure rate of 1.15% would be nearly 1.5%, according to the Mortgage Bankers Association.
Meanwhile, the "surge in FHA loans is likely to overtax the oversight resources of the FHA, making careful and comprehensive lender monitoring more difficult," said Kenneth Donohue, Inspector General for the Department of Housing and Urban Development, in testimony before Congress in June.
Donohue noted that heavy loan volume makes the FHA "vulnerable to exploitation by fraud schemes."
The FHA recently suspended Taylor, Bean & Whitaker Mortgage for suspected fraud. The No. 12 U.S. mortgage lender in the first half of 2009, Taylor recently filed for bankruptcy.
The agency itself, in an e-mail response to IBD questions, acknowledged "some pressure on FHA's operational environment," but said "system enhancements and process changes" are agency priorities.
FHA also stressed that it historically has been less prone to fraud than similar private lenders, citing its insistence on full documentation from borrowers.
Donohue also worried that surging FHA volume has "collateral implications for (Ginnie Mae's) integrity."
That could have serious policy implications for reform of the secondary mortgage market after the collapse of Fannie Mae (NYSE:FNM - News) and Freddie Mac (NYSE:FRE - News), which will cost taxpayers hundreds of billions of dollars.
The MBA on Wednesday proposed breaking up Freddie and Fannie into smaller, private entities that would issue a government-backed, mortgage-backed security.
This "CG" security "would be conceptually similar to the Ginnie Mae model," the MBA's report said. Indeed, it suggested "Ginnie Mae could potentially take on the responsibilities of the CG."
Cecala notes that defaults on FHA loans can create headaches for Ginnie Mae investors, even though the FHA covers any losses. A default means a Ginnie Mae MBS gets paid early, causing difficulty for those investors who expected the payments to continue for a number of years.
But Cecala added that he was "not aware of Ginnie Mae investors being concerned" so far.