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FHA Audit Reveals Good and Bad

This year has proved to be one of the ""Federal Housing Administration's"":http://www.fha.gov (FHA) best yet in terms of loan originations - during FY 2008, which officially ended for the agency on September 30, lenders originated a record $171.8 billion in FHA single-family loans.
And according to the independent auditor who conducted the administration's ""annual review"":http://www.hud.gov/offices/hsg/comp/rpts/actr/2008actr.cfm, the quality of the loans was higher than it has been in past years, thanks to tighter underwriting standards by lenders regarding credit scores and loan-to-value ratios. The auditors from ""Integrated Financial Engineering Group"":http://www.ifegroup.com/ (IFE Group) in Rockville, Maryland, also said they expect the gains in FHA originations to be a trend that continues for several more years.
Recent data released by ""Lenders One Mortgage Cooperative"":http://www.lendersone.com illustrates the rise in government-insured mortgages. Compared with total volumes through the third quarter of 2007, Lenders One said that levels of FHA, as well as Veterans Administration (VA) loans have more than tripled through the same period in 2008.
Lenders One is a national alliance of mortgage bankers which was established in 2000 and is based in St. Louis. Its more than 125 members originate $40 billion in mortgage loans annually, and Lenders One tracks and compiles the loan activity of its member companies.
""We are experiencing a changing marketplace, and our members have appropriately adjusted their business models and lending strategies to meet borrower demand,"" said Scott Stern, CEO of Lenders One. ""FHA has been our most important product of 2008. FHA has helped borrowers all across the U.S. refinance out of dangerous nonprime and Alt-A loans into safer, more secure FHA products,"" Stern said.
In early 2007, FHA represented only one percent of the cooperative’s total originations - it now comprises nearly 50 percent of Lenders One’s total activity. According to Stern, we are likely to see a continued shift in the types of loans with which lenders and investors have a comfortable risk-level, and that at the same time meet the needs of the general public.
And now for the bad news -- the administration's auditors, said that because of declining home values that are expected to weaken the future performance of these loans, they have lowered the estimated value of the FHA Mutual Mortgage Insurance (MMI) fund by 39 percent to $12.9 billion. The FHA insures lenders against defaults on home mortgages, and this fund pays for any losses that the agency may have to cover.
According to IFE Group, the value reduction, coupled with the 29 percent jump in the number of FHA loans, diminished the capital ratio of the administration's insurance fund to 3 percent (down from 6.4 percent in FY 2007). That drop brings the capital ratio dangerously close to the 2 percent level that FHA is required by law to maintain. If the ratio falls below the 2 percent mark, Congress would have to provide taxpayer funds to make up the difference. However, the audit shows that FHA should be able to keep its capital ratio above the mandated amount at least through 2015.
""The FY 2007 book may turn out to be the worst book over the past 30 years and the FY 2008 book will be even worse,"" the auditors said in their review. IFE Group said that the falling value of the fund could be attributed primarily to the sharp drops in property prices that are expected to continue through 2009 and into 2010, as well as increasing foreclosures, both of which could lead to an increase in the number of claims the FHA must pay.
According to FHA's own data, the seriously delinquent rate on its single-family loans increased 31 basis points to 6.91 percent during its record-setting FY 2008.

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.
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