The FHA’s Annual Audit

Housing economist Thomas Lawler notes that the agency’s financial condition could be worse than it appears because loan modifications may be simply pushing losses into future years. Foreclosures on FHA-backed loans rose by around 40% last year while modifications spiked by 80%. The re-default rate on modifications for FHA-backed loans are the highest in the industry, and many modified loans could eventually go in default. FHA officials say their audit accounts for higher default rates on modified loans.

The Federal Housing Administration has been able to avoid any bailout money, but the agency’s reserves are at levels that don’t leave much of a room against future losses.

The FHA’s annual audit showed that the agency’s reserves were largely flat from a year ago. The amount of cash on hand, at $33.3 billion, went up because the agency did so much business in the 2010 fiscal year, which ended Sept. 30. (The FHA, for example, guaranteed 1.1 million home-purchase loans in the recently concluded fiscal year, the most in its 76-year history.)

Estimated losses must be subtracted over the next 30 years, which leaves the agency with a surplus of just $4.7 billion to handle any unexpected claims, or 0.5% of the $931 billion in mortgages that it guarantees. The agency estimates that it will take five years to put that ratio back at the 2% level required by Congress.

“The report understates the true improvement to date in FHA’s outlook,” said Peter Swire, a former White House housing adviser who teaches law at Ohio State University.

All that to say that even though we’ve seen prices move down a bit today, the net effect is mortgage-backed securities (MBS) ended the week largely where they began and the best conventional/FHA/VA 30 year fixed mortgage rates remain in the 4.25% to 4.50% range for well-qualified borrowers. The best conventional/FHA/VA 15 year fixed mortgage rates are in a range between 3.500% and 3.875%.

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