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Local Market Price Trajectories Provide Look Into FHA Profitability

According to a ""recent article written by Andrew Jakabovics"":http://www.americanprogress.org/issues/2010/02/fha_price_news.html, an associate director for housing and economics at the ""Center for American Progress"":http://www.americanprogress.org/, the ""Federal Housing Finance Administration's"":http://www.fhfa.gov/ (FHFA) house price index (HPI) is a reminder that local markets behave differently over time, which strongly affects both lenders' and insurers' profitability, or lack thereof.

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""As DSNews.com reported"":http://dsnews.comarticles/house-prices-fall-slightly-in-q4-2009-fhfa-2010-02-25, the FHFA released its quarterly HPI on Thursday, showing a 1.2 percent decline in the price of homes purchased during the fourth quarter of 2009 compared to the same quarter in 2008. While overall prices dropped at the national level, FHFA's HPI indicated a different story at the state and metropolitan level.

On a quarter-to-quarter basis, home prices in the fourth quarter rose in 27 states and Washington, D.C., and over the entire year, prices increased in 19 states. In his article, Jakabovics said these price trajectories have very important implications for lenders' and insurers' balance sheets, particularly for the ""Federal Housing Administration"":http://portal.hud.gov/portal/page/portal/HUD/federal_housing_administration (FHA).

FHA insures mortgages that are then securitized and sold to investors with an explicit guarantee, and borrowers with FHA mortgages pay an upfront insurance premium as well as an annual premium, Jakabovics explained. He said the premiums borrowers pay go toward a fund that pays out claims when insured mortgages go through foreclosure.

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As a result, FHA's losses are an obvious function of the number of loans that go through foreclosure, however Jakabovics said the magnitude of those losses are driven by the current value of the properties on their books relative to the outstanding mortgage balances and the insurance premiums paid over the life of each loan.

In 2008 and 2009, FHA insured 3.2 million single-family mortgages. By using the FHFA HPI to measure quarterly price changes at the metropolitan level, Jakabovics estimates that 2.5 million of these FHA-backed homes are effectively above water on FHA's books, accounting for the upfront premiums but assuming no annual premiums paid.

Jakabovics also used data from the HPI to predict that about 700,000 homes are currently worth less than their initial mortgage amounts, which translates into 21 percent of FHA properties currently underwater. While these properties pose potential costs to FHA's insurance fund, Jakabovics said it is worth noting that this figure is below the 24 percent of all mortgages currently estimated to be underwater by First American Core Logic.

Jakabovics said FHA's annualized foreclosure rate never exceeded 1.6 percent of its outstanding mortgages between January 2008 and August 2009, and he explained that a significant share of properties in foreclosure do not result in claims being paid. Regardless, Jakabovics said FHA's 2008 and 2009 activities would still be profitable even if every 2008 and 2009 FHA mortgage that is currently severely delinquent or in foreclosure were to generate claims against the FHA insurance fund, provided those properties were sold off at current market value.

To further investigate potential losses for FHA from loans insured in 2008 and 2009, Jakabovics is working with the Center for American Progress on an in-depth analysis that will include state and metropolitan level data. The study is slated for release next month.

About Author: Brittany Dunn

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