Mortgage defaults strain the Federal Housing Authority. How does this affect the home loan market?
Mortgage defaults are straining the resources of the Federal Housing Authority, the agency credited with stabilizing the nation’s housing market when private institutions were cutting back on lending.
Tight credit continues to constrain the housing recovery, according to the National Association of Realtors, which claims that today’s homebuyers face “unprecedented hurdles” in qualifying for a mortgage.
In the past year, the FHA has provided access to credit for close to 40 percent of all homebuyers needing mortgages and has reduced mortgage payments for 142,000 distressed homeowners through loan modifications.
The agency has also insured more than $218 billion in single family mortgages and helped 440,000 families refinance their mortgage rates, saving households an average of $160 a month, said the agency. The FHA has also enabled more the 585,000 families to become first-time homeowners, accounting for 56 percent of the nation’s first-time buyers, and helped more than 362,000 families avoid mortgage defaults and foreclosures.
In a report to Congress today, the agency said that capital reserves in its Mutual Mortgage Insurance Fund – the backbone of the FHA single-family and reverse mortgage programs – are at .24 percent of total loans insured, well below the Congressionally-mandated threshold of a 2 percent capital reserves. New risk controls will help the agency meet its reserve requirements by 2014, the report said.
“Losses on loans insured through the first quarter of fiscal year 2009 continue to place a significant strain on the fund and are expected to reach $26 billion within a few more years,” said the agency in a prepared statement. Loans insured in 2010 and 2011 are expected to be very profitable and provide revenues to help offset losses on earlier loans.
The agency continues to suffer big losses from mortgage defaults on loans insured before 2009, but barring a further significant downturn in home prices, the fund will start to rebuild in 2012, the report said. The FHA capital reserve ratio measures the reserves in excess of those needed to cover projected losses over the next 30 years. The current capital reserve ratio has fallen by more than half from 0.50 percent in 2010.
To help restore the market to normalcy, private banks need to return to reasonable lending standards, said Ron Phipps, president of the National Association of Realtors, a leader advocate for the real estate industry. Data from the group shows that a record number of housing contracts have fallen through because of low appraisals and declined mortgage applications.
The average credit score for home buyers seeking conventional mortgages was 760 in 2010, up from 717 in 2007. But as credit score requirements get tougher, many Americans are seeing their eligibility decline. One-fourth of Americans have credit scores below 599, almost double the level of two years ago. A mortgage default on a conventional loan will give a buyer a negative credit score for at least seven years, while a foreclosure on an FHA loan can have a three-year impact, the realtor group said.
Despite the tight credit market and declining home values, more than half the investors surveyed by Millionaire Corner in September say they believe now is a good time to buy real estate. Less affluent investors, those with a net worth less than $100,000, were especially interested, and more than 60 percent indicated it was a good time to find values created by weak demand and a surplus of homes foreclosed due to mortgage defaults.