TEXT-S&P discusses FHA capital deficit, loan origination

Tue Nov 20, 2012 4:44pm EST

Nov 20 - The U.S. Department of Housing and Urban Development (HUD)
announced Friday that the Federal Housing Administration (FHA) does not have
enough reserves to cover its projected losses. Standard & Poor's Ratings
Services believes that even though the capital reserve position of FHA is
negative, the agency has avenues to secure sufficient assets should it need
them, and will be able to honor claims of housing finance agencies (HFAs) as it
has to date. As FHA insurance is a significant provider of loan guarantees for
most HFA single-family whole loan 
programs, FHA's ability to pay claims is critical to the strength of these 
bond programs.

Standard & Poor's has ratings on 33 large single-family whole loan indentures. 
The percentage of loans with FHA insurance ranges up to 98%, while some 
indentures have no FHA loans. HFAs follow strict underwriting standards 
including obtaining three years of tax returns for all first time homebuyers, 
which is their primary market. On average, HFA loan performance has equaled 
that of nonagency prime loans, and delinquency has remained around 7%, with a 
smaller percentage going into foreclosure.

The HUD report indicated that the FHA mortgage insurance fund has a capital 
reserve ratio of negative 1.44%, or negative $16.3 billion at the end of 
fiscal 2012. This compares to a reserve position of $2.6 billion for fiscal 

We do not believe that this negative position impairs existing FHA loans 
should they go into default. FHA has the ability to access funds from the U.S. 
Department of the Treasury without congressional approval. FHA has until 
September 2013 to determine whether to seek funds from Treasury. It is our 
opinion that FHA will do so based on the fund's position in 2013 as well as 
the economic forecast from President Obama's fiscal 2013 budget.

However, the difficult position that FHA finds itself may limit the number of 
loans that it guarantees going forward. As stated before, many HFA indentures 
include significant amounts of FHA loans. As private mortgage insurance has 
ceased to be an option for HFAs, the state agencies have relied more heavily 
on FHA for whole loan programs. A slowdown in FHA insurance would place more 
emphasis on insurance from the U.S. Department of Veteran's Affairs and the 
U.S. Department of Agriculture, both of which have limited capacity and have 
traditionally insured fewer loans than FHA.

Standard & Poor's, a part of The McGraw-Hill Companies (NYSE:MHP), is the 
world's foremost provider of credit ratings. With offices in 23 countries, 
Standard & Poor's is an important part of the world's financial infrastructure 
and has played a leading role for 150 years in providing investors with 
information and independent benchmarks for their investment and financial 
decisions.(New York Ratings Team)
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