Now, according to Fitch Ratings, a new tide of mortgage delinquencies and price declines may tip the fund back toward troubled waters – and possibly insolvency.
The ratings agency said Friday that it sees problems arising from a difference between 90-day past due delinquency patterns for home loans backed by the agency and those without government guarantees.
“This may eventually force the FHA to look for opportunities to put back some defaulted loans to the banks, particularly if the agency’s funding status worsens and U.S. home prices fail to rebound quickly,” it said in a statement.
According to Fitch, the FHA’s fiscal position benefited from the raise in upfront premiums but stays “very weak” in lieu of its inability to meet a congressionally required 2 percent capital buffer.
The FHA capital ratio buffer currently stands at just 0.24 percent.
The ratings agency found that government-backed mortgages constitute 83 percent, or about $66 billion, of 90-day past due delinquencies currently out there on the market.
“This highlights the dimension of the growing delinquency problem for the FHA, given the predominant position of FHA-guaranteed loans in the troubled asset categories of major banks,” Fitch said. “While delinquency rates for nonguaranteed loans have been improving steadily at these institutions, the trend for FHA-guaranteed loans is starkly different.”
A down-payment requirement increase on its way will likely worsen matters for the FHA, according to Fitch, which said that it expects the agency to resort to “unconventional” practices in order to prevent a bailout scenario and shore up the beleaguered fund.
The scenario isn’t far-off from a crisis several experts predicted last year. Joseph Gyourko, a real estate and finance professor at the University of Pennsylvania, reported last fall that the $2.6 billion capital deficit vis-à-vis $1 trillion in insurance-in-force could mean a bailout.
Just by how much? Anywhere from $50 billion to $100 billion, according to Gyourko. If a bailout took place, it would be the first for the FHA in its nearly 80-year history.
Speaking with MReport for a past interview, FHA Acting Commissioner Carol Galante defended the role that premium raises play in keeping the agency afloat. “We think this is appropriate, but we have to do it carefully and gradually,” she told us.
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