For the first 20 years of it's existence the Federal Housing Administration, created in 1934, enjoyed a delinquency rate of 0.2%. As of September 2012, the delinquency rate has surged to a record 17.3%. Compare that to less than 2% for privately insured mortgage company, MGIC.
According to the October 2012 issue of FHA Watch, were the FHA to abide by the GAAP Standards required by law for privately owned businesses, FHA would have a negative net worth of -$28.3 BILLION dollars! FHA's capital shortfall would be an astounding $67 BILLION dollars, based on a 4% capitalization rate.
When FHA began it's existence in 1934, it reduced down payments from 50% all the way down to 'only' 20% along with a 20 year mortgage. As a result, FHA enjoyed years of stable, predictable results. But in the late 1950's congress began allowing FHA to accept a 95% LTV with a 30 year term, and borrowers had to pay only 5% down for the first time ever. It also made it easier to buy a home than it had ever been before, by lowering mortgage payments. This move set off a boom in new home sales, but the unintended consequence was a soaring delinquency and foreclosure rate, which had virtually doubled to 2% by the mid-1960's.
Home ownership is today, essentially equal to it's historical peak in 1979, at about 65.5% of households. Home ownership rates have been trending downward since 2006, yet FHA's foreclosure starts have again spiked at crisis levels, more than six times the rate for Fannie Mae.
The report goes into a lot more detail about statistics and the underlying problems that are the primary causes of the poor results being realized at FHA. One that really sticks out to me is that FHA delinquencies and foreclosures have gone steadily up since 1976.
FHA is the backbone of the US housing market, and has been highly successful in it's mission to help first time buyers obtain home financing. It is also the keystone of the housing market, since FHA insures about 80% of all new home mortgages. In the report, American Enterprise Institute Fellow, Edward Pinto, makes a number of recommendations for changes that could help FHA continue to successfully fulfill it's mission as the foundation of the housing market. The solvency and stability of FHA is also an important factor for our national economic health.
The report also helps to highlight the lack of truthful accounting practices in government agencies. Given that the FHA does not have to utilize the same accounting standards as private companies, it's much easier for FHA to fool themselves, the congress and the US taxpayers into believing that operations are in better financial shape than they really are. If we are ever going to get control over federal budget deficits, and reign in unnecessary, wasteful spending, we can start by making FHA and other agencies stick to sensible accounting rules.
As it is at present, the housing market can't survive without FHA mortgage insurance. On the other hand, rising delinquency and foreclosure rates could lead to the death of FHA if we don't get them under control soon.
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Donna S. Robinson is a residential market analyst, investor and author located in Atlanta, GA. Follow her on twitter at donnaconsults and read her blog at www.RealtyBizConsulting.com
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