For the first time in its existence, the Federal Housing Administration (FHA) has taken a $1.7 billion subsidy from the U.S. Treasury. The FHA Commissioner maintains the FHA is healthy; the decision to take the bailout was based on old data. The FHA claims recent improvements in its finances will be proved by data coming out in the next few months.
The FHA insures $1.1 trillion in mortgages and 15% of all purchase-assist mortgages. This is significantly greater than its 4% share of the market in 2007. This larger market share is also the cause of the agency’s current financial troubles — FHA-backed loans originated in 2007-2009 are predicted to ultimately cost the administration $70 billion. The FHA has also suffered losses from reverse mortgages, 90% of which are insured by the FHA.
Although not quite hale and hearty, the FHA has improved its finances over the past year. In November 2012, the FHA was predicted to need a $16.3 billion bailout in 2013. However, increased mortgage insurance premiums (MIPs), tighter underwriting requirements and rising property values have reduced the actual subsidy to $1.7 billion.
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The FHA exists as a last resort for homebuyers with slim savings. This demographic is not 15% of the entire mortgage market. As the FHA returns to its more conservative business practices, the result will be a reduced market share closer to 4% of the market, its pre-2007 level.
Private mortgage insurance (PMI) companies are more than able to fill the gap left by the FHA’s retreat. Further, PMI companies have no social agenda — they do not exist to make homeownership easy. They provide a service in exchange for a fee, which means they must do good business in order to survive. (The government is certainly not going to bail them out, since it has done so for nearly every other financial entity while leaving PMI companies to fend for themselves.) PMI companies’ ability to profit determines their success and continued existence.
PMI companies aren’t unerring or bullet-proof. Just look at the fate of PMI Group Inc. and Triad Guaranty Inc, following the Millenium Boom. Both went under due to losses suffered from an overwhelming flood of mortgage defaults. But given the choice between PMI companies and the FHA, PMI companies are much more likely to create a stable real estate market. They have a lot more riding on their solvency than the FHA does.
Although the transition from FHA to PMI-backed mortgages will slow the market slightly, it will also stabilize it. PMI companies are more conservative in their underwriting standards, but isn’t that desirable when it comes to backing billions of dollars in home loans?
Re: “Federal Housing Administration to Take $1.7 Billion Subsidy” from Bloomberg.