Federal Housing Administration (FHA)-insured loans have performed better in the first three quarters of the fiscal year (FY) than predicted, according to the agency's report to Congress. The report, issued by the insurer's chief risk officer, Bob Ryan, covers activity through June and shows the FHA is on track to insure 1.7 million loans in the full fiscal year ending Sept. 30.
Driven by strong books of business over the past two years, the FHA has paid out fewer claims than were projected by an audit of the agency last fall. From October 2009 to June 2010, the FHA paid out $9.38 billion on 75,442 claims – almost 20,000 fewer claims and $3.7 billion less than projected in last year's audit.
Claims expenses were ramping up in the second quarter of fiscal year 2010 but were offset by an increase in the up-front premium rate charged on FHA-insured loans, the report says. The up-front premium rate moved from 1.75% to 2.25% in April. Through the end of June, the agency's Mutual Mortgage Insurance fund operations had a positive cashflow of $446 million, meaning the insurer took in greater premium revenues and REO sale proceeds than it paid out in default claims and holding costs.
The report to Congress highlighted the change in quality among books of business from 2007 to 2010. The average borrower credit score, for example, has increased from the low 600s in FYs 2007 and 2008 to about 700 today. Fiscal years 2007 and 2008 appear to be the worst books since the early 1980s for the FHA. FHA Commissioner David Stevens has noted in the past that those years featured an influx of new FHA-approved lenders, including those with backgrounds in the subprime space.
‘Those book years have been particularly stressed by the current economic environment, were underwritten to lower standards than are permitted today, and more than 30 percent of purchase loans in each of these years utilized seller-funded down-payment assistance,’ the report states, adding that claim rates for loans made with seller-funded down payments are almost three times higher than the claim rates for other loans.
Serious delinquencies and early-period delinquency rates have improved significantly, the agency says, with the 90+ day delinquency rate for loans endorsed in fiscal year 2009 lower than for any book since 2005. While FYs 2007 and 2008 are expected to continue posing problems – their lifetime claim rates are estimated to be 20% or more – FYs 2009 and 2010 absorb a greater share of the whole FHA portfolio. In total, FYs 2009 and 2010 make up 60% of the outstanding dollar balance in the agency's insured portfolio.