The Federal Housing Administration (FHA) has just $3.5 billion in its Ã¢â‚¬Ëœcapital reserve account,' according to the agency's quarterly report submitted to Congress this week. That's lower than the $3.6 billion reserve balance last November when FHA informed officials that its cash cushion had fallen below the lawfully permitted threshold
The decline last quarter, though, is the result of a shuffling of funds. FHA moved $9.8 billion from its capital reserves to its Ã¢â‚¬Ëœfinancing account,' the fund used to cover insurance claim payouts for loan defaults and losses within its portfolio. The transfer bumped this loss reserve account up to $29.6 billion Ã¢â‚¬" the largest it's been in more than two years (perhaps longer, since the historical figures provided in the report to Congress go back only to September 2008).
The reassigning of funds depleted the agency's capital reserve account by 71 percent in a short three-month span, and suggests that the FHA may be preparing for another wave of defaults and mortgage insurance claims.
So far this fiscal year, however, prepayments and claims are coming in well below the projections made by an independent actuarial study at the end of FY 2009.
Actual prepayments, or full loan payoffs, in this fiscal year are less than half the number forecasted by the independent actuary, according to FHA's report. Historically, most prepayments did not return to FHA as new insured loans as homeowners instead turned to the conventional market. However, FHA says with today's credit conditions, many prepayments now are coming back to FHA as new or refinanced mortgages and insurance, and the federal agency maintains its existing revenue stream on these loans.
The number and dollar amount of actual insurance claim payments are also much lower than was projected last year, though FHA says claims are still trending upward. To date, FHA has received 19,310 fewer insurance claims and paid $3.7 billion less than was projected by the independent actuary.
The agency cites three possible reasons for the decline. First, home prices have been more stable than was projected last year. Secondly, FHA loan servicers are aggressively pursuing loss mitigation actions, which reduce the number of foreclosures and claims resulting from 90-day delinquencies. And, finally, some states are experiencing processing delays because of the large backlog of foreclosures.
Loss rates on claim actions are somewhat higher than projected, however, at 58 percent versus 55 percent. FHA says it has taken additional steps to sell its inventory of aged properties, meaning REOs that have been on the agency's portfolio for more than a year. However, these homes tend to have fairly low recoveries on sale, FHA explained. Loss rates on insurance claims also continue to be affected by very low sale recoveries in Michigan, where FHA has its largest number of dispositions.
The agency's quarterly report to Congress also states that through the first three quarters of fiscal year 2010, FHA has endorsed more than 1.3 million single-family loans, and is on pace to insure 1.7 million loans in the full fiscal year ending September 30.
Home purchase mortgage insurance volume may itself surpass one million loans for the first time since 1987, according to the federal agency. At the same time, refinance activity has slowed sharply from its peak in the second quarter of 2009. Reverse mortgage insurance also is down substantially this calendar year.
On the plus side, FHA says the quality of loans coming into its insurance portfolio has improved considerably.
For four quarters running, more than one-third of all FHA borrowers had credit scores at or above 720, while just three percent had credit scores under 620. The average credit score on current insurance endorsements is just under 700.