“Today’s release of the FHA actuarial review tells us that FHA continues to play its intended countercyclical role in stabilizing housing markets during periods of economic stress, “ says former FHA official Sarah Rosen Wartell.
“Today’s housing market is the 100-year flood. Congress established the capital reserve fund in 1990 to protect against unforecasted claims, but few imagined house price declines like those we have experienced already. And despite the fact that spillover from toxic conditions in the subprime market and poor policy choices in prior years left FHA with even more significant losses than the down economy would produce, it appears more likely than not that FHA will withstand those conditions without calling upon taxpayer resources. For homeowners, taxpayers, and the economy, FHA is working pretty well,” Wartell notes.
“Real risks remain to the taxpayers; origination practices of some participants are troubling; and there is a long, long way to go to better manage risk and restore FHA’s staffing and systems to what is required,” says Wartell. “But Secretary Donovan and his team bring unique expertise and seriousness to the task and have so far made all the right moves.”
Housing market analyst Andrew Jakabovics adds: “CAP’s own analysis of risk in the recent FHA portfolio is producing preliminary results consistent with the findings published today.”
“FHA argues that the credit quality of the rapidly growing FHA-insured portfolio has markedly improved over prior years, which has helped strengthen FHA. Similarly, a disproportionate share of the losses is coming from mortgages with seller-funded down payments, which are no longer being added to the portfolio. CAP’s preliminary analysis finds that the recent book of business is likely to be protected from severe losses, even if default rates remain high, because they have largely expanded their activities in markets that have already fallen, thus minimizing exposure to losses from substantial future price declines. If FHA retains a significant market share in next few years before private capital returns, the chance that we will need to use taxpayer funds to pay FHA claims will become increasingly remote,” says Jakabovics
CAP Executive Vice President Sarah Rosen Wartell was a Clinton Administration appointee to the FHA from 1993 through 1998, serving as, among other things, the Deputy Assistant Secretary for Operations and the Associate General Deputy Assistant Secretary.
CAP Associate Director for Housing and Economics Andrew Jakabovics is working on his own data analyses of the trends in the FHA portfolio. Both are available for comment.