November 16, 2011

Enough Money In FHA Mortgage Insurance Fund?

November 16, 2011

Enough Money In FHA Mortgage Insurance Fund?

Below is a bit more on HARP 2, the government’s latest version of an underwater refinance program. But first, let’s look at whether the FHA has enough money to back the loans they insure. They back these loans using mortgage insurance premiums collected from borrowers monthly.

HUD just released its annual report on the FHA mortgage insurance fund, and noted that it believes its capital position of the insurance fund remains strong and expects to surpass its 2% capital ratio earlier than initially expected.

The positive outlook is largely driven by the profitability of new originations, which are substantially better credit than 2005-08 collateral and are currently paying much higher mortgage premiums.

“However, if economic conditions and home prices deteriorate much more than expected, the fund could find itself in a negative capital position.

This could cause HUD to reconsider its position and increase the FHA annual premium [from 1.1-1.15% today].

Such a move would be a substantial positive for GNMA convexity going into 2012…HUD indicates that, in the midst of continued weakness in housing markets across the county, the MMI Fund capital ratio remains positive this year at 0.24 percent.

With new risk controls and premiums put in place by the Obama Administration, the independent actuaries predict the Fund will return to the Congressionally-mandated threshold of 2% capital more quickly than was projected by last year’s review.

FHA’s capital reserve ratio measures reserves in excess of those needed to cover projected losses over the next 30 years. The independent actuarial reviews of the MMI Fund estimate FHA’s capital reserve ratio to be 0.24 percent of total insurance-in-force this year, falling from 0.50 percent in 2010.”

HARP 2: Underwater Refinance Update
If we put yesterday’s Fannie and Freddie HARP 2 guidelines for underwater refinances in plain language, they’re saying they’ll reduce fees and relieve lenders from some liability on home loans in order to lower the cost of borrowing to distressed homeowners.

For example Fannie Mae said: “The lender is not responsible for any of the representations and warranties associated with the original loan.”

But as detailed yesterday, the timeline is at least 1-3 weeks for lenders to implement new guidelines and start quoting HARP rates and accepting consumer loan submissions. You can SEE IF YOU QUALIFY while you’re waiting.