Heading into 2019, the Federal Housing Administration (FHA) says it is doing rather well as an offshoot of the bullish U.S. housing market. In fact, the agency has seen the ratio of net worth to total mortgages in its Mutual Mortgage Insurance (MMI) Fund, which collects premiums and pays claims, grow by $7 billion this year.
FHA also says that at year's end, it finances 33 percent of purchase activity for first-time homebuyers, and 34 percent of all minority purchase activity, plus there's $209 billion in new FHA mortgages “for which future revenue is expected to exceed future expenses,” according to a new agency report.
How this will all work for the buyer, though, might be a different story. FHA, after all, tends to help buyers who need it more, and upward swings in the share of borrowers using down payment assistance—despite a 3.5 percent downpayment requirement—could signal more buyers are stretching too thin.
“These mortgages,” FHA reports, “tend to be riskier both because the borrowers have not demonstrated the ability to put money aside and because they tend to have less discretionary income to weather setbacks.”
The agency's annual report shows that the share of FHA mortgages with downpayment assistance has gone from 30 to 39 percent over the last five years.
Riskier cash-out refinances have also increased, from 142,000 to 152,000 loans since last year, with their share of the refinance universe rising from 39 to 64 percent. This, even though refinances overall are down.
On the upside for consumers—and the downside for FHA—access to credit is expanding, even as credit scores are drifting lower, as a result of debt-to-income (DTI) ratios increasing.
“While these decreases in credit scores and increases in DTI ratios may increase the FHA’s risk, they are part of the program’s natural cyclicality,” the agency reports. “That said, we do worry about the increased default posed by risk layering.”
In reverse mortgages, the agency says Type 1 claims—the ones representing actual losses from disposing properties backing these mortgages—dropped from $677 million to $612 million since 2013 and 2015 numbers. Recoveries are also increasing. That's more good news for consumer trends, but the 19 percent dropoff in its reverse mortgage program spells a $14 billion shortfall for FHA.
That's actually about the same as it was a year ago and seems to be related to an appraisal bias in the program.
“Appraisal bias on nonpurchase mortgages has long been a feature of the mortgage market,” the agency says, “and the FHA estimates that the appraisal bias is now under 5 percent, falling from much higher levels 10 years ago.”
Moreover, the agency says, this level of appraisal bias should not add much incremental risk given that seniors can tap only about half the equity in their house through the program.
“We would encourage the FHA to release more loan-level data on the reverse program so that researchers can better understand the drivers of risk in this program—one that appears to be hemorrhaging even in an environment with 7 percent home price appreciation,” the report concludes.