Analysts Stress Need for FHA Reform

As the government works toward GSE reform, ""Keefe, Bruyette & Woods"":http://www.kbw.com/ (KBW), a financial services provider, says reform for the ""Federal Housing Administration"":http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/fhahistory (FHA) should also be a top concern.

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""While FHA reform has been discussed, it has clearly played a secondary role to the more pressing issue of GSE reform,"" KBW stated in a recent report.

KBW continued, ""However, we continue to believe that the two have to be done in conjunction to avoid a potential shift in volume back to the FHA.""

The agency grew from a portfolio of about $400 billion before the housing crisis to about $1.1 trillion since, all while its capital reserves fell to -1.44 percent in 2012 despite a mandated minimum of 2 percent.

The FHA reported a projected capital reserve of -0.4 percent for this year before a rise to 0.2 percent in 2014.

Meanwhile, the agency has upped its premiums and received $1.7 billion from the Treasury to bolster its financial status and keep the agency viable.

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In addition, the FHA plans to sell about 40,000 distressed loans in its portfolio this year, and it is focused on loss mitigation strategies in order to reduce potential losses.

While its portfolio remains large, the FHA has reduced its footprint in the market somewhat. In particular, the agency has reduced its share of low down payment loans from more than 80 percent of the market to about 50 percent, according to KBW.

Additionally, ""Going forward, we believe that higher-quality borrowers will take GSE loans with private mortgage insurance as opposed to FHA loans because of the significant price advantage,"" KBW stated.

""The longer-term role of the FHA should continue to narrow,"" according to KBW, which also pointed out, ""The price changes that are in place should help give the FHA a meaningful start in this direction.""

KBW praises the Protecting American Taxpayers and Homeowners (PATH) Act--a House of Representatives Bill introduced in July--for its attention to FHA reform. However, the financial services company doubts the act's viability.

The PATH Act would reduce the FHA's role in the market, concentrating its efforts on first-time homebuyers, low- to moderate-income buyers, and homebuyers purchasing in disaster areas.

The act also calls for risk-sharing on 10 percent of the FHA's business.

While these provisions are ""aligned with the government's goal of supporting the low-income housing market"" and ""the government's goal of bringing more private capital into the mortgage market,"" KBW does ""not expect it to get traction,"" because it calls for the eradication of the GSEs.