According to Paul Miller of FBR Capital Markets, the largest home loan lenders and servicers could be hit with another government loan default fiasco. It seems that even with the low FHA rates, borrowers are still making payments late and defaulting.
In the wake of the Federal Housing Finance Agency’s mortgage lawsuits against Bank of America, Citigroup, JPMorgan Chase and a dozen other lenders, the nation’s largest banks could be facing a wave of losses on insurance claim denials by the Federal Housing Administration, or FHA. Miller cited “conversations with industry and Washington contacts,” there is “a growing concern over the risk that FHA mortgages pose to originators and servicers,” since the agency “only a $4.7 billion capital buffer against a $1 trillion portfolio, which translates into a reserves to insured loan ratio, or capital ratio, of 0.50%, well below the 2% mandated minimum.”
This means the FHA could be forced to tap into its credit line with the Treasury in order to continue paying out on FHA lenders and servicers’ claims.
Since “the FHA needs to avoid tapping into its credit line to prevent comparisons to Fannie Mae and Freddie Mac,” according to Miller, the agency has increased its mortgage insurance premiums and increased borrowers’ down payment requirements. If those measures fail to shore-up the FHA’s finances, the analyst said “the agency could turn to widespread claim denials in order to reduce losses to its insurance fund.” Miller said that the FHA’s focus in its efforts to deny more claims “will likely be on missteps made in the hyper technical servicing process,” although “the possibility remains that the agency could be looking for any mistakes made throughout the loan’s life, therefore exposing the lenders to losses as well.” While providing detailed loss estimates for the largest mortgage lenders and servicers, the analyst said that “until there is more widespread evidence of FHA claim denials, we believe that the risk is more of a headline risk than a capital concern.” Read the original FHA Mortgage Mess article.
