HUD's Donovan says FHA health better than expected

WASHINGTON (Reuters) - The Federal Housing Administration is in better financial health than predicted last fall thanks to stronger performance on FHA-backed loans in the first part of 2010, Housing and Urban Development Secretary Shaun Donovan said on Monday.

Donovan made the comments as the Obama administration introduced a new “scorecard” to assess the government’s efforts to stabilize the housing market. Donovan said the market is in a “fragile” recovery and “significantly better” than predicted a year ago.

“We still may see further declines,” he cautioned.

Delinquencies on FHA-backed loans rose slightly to 12.4 percent in May from 11.7 percent in April, but were down from 13.6 percent a year earlier after stronger-than-expected performance in the first half of 2010.

“Overall FHA performance is somewhat better than was predicted when the actuarial review was completed” in the fall of 2009, Donovan told reporters on a conference call.

An independent actuarial study last autumn said FHA capital reserves had fallen to just 0.53 percent of the value of the thousands of outstanding U.S. home mortgages it insures, well below the 2.0 percent required by law.

The report is an effort by the Obama administration to bring more attention to all its housing programs. The best known, the Home Affordable Modification Program (HAMP), which provides incentives to lenders to modify loans for troubled borrowers, has been widely criticized as ineffective.

The latest HAMP statistics released Monday show that slightly more than one in ten borrowers eligible for lower payments has received a permanent loan modification, while about one in three borrowers who started in the trial program has been kicked out.

The number of borrowers who have received a permanent loan modification rose to 340,459 in May from 295,348 reported in April. That’s about 11 percent of 3.2 million HAMP eligible loans.

At the same time, the number of trial modifications continued to fall as borrowers must now provide proof of income prior to any new payment plan. Active trial modifications fell to 467,672 from 637,353 in April.

And borrowers who received loan modifications under the old rules are now having to prove their income before getting a permanent modification.

An additional 150,000 borrowers who could not prove their income or keep up with the new payments had their modifications canceled in May, bringing the total number of cancellations to 429,696. That’s about 35 percent of the 1.24 million trial modifications started.

Edward Pinto, a former top official at Fannie Mae who now works as a consultant to private sector mortgage lenders, cautions that FHA’s strategy of growing its way out of its problem “is always very dangerous.”

“What they are doing is rebuilding their capital (reserves) by maintaining a very high market share,” Pinto said, noting that FHA’s share of the mortgage market has ballooned to 30 percent from just a few percent during the housing bubble.

“The first rule of banking and lending is when you are in a hole, stop digging,” he added.

Donovan noted that home prices have leveled off in the past year after 30 straight months of decline and the number of homeowners who have received a restructured mortgage since April 2009 has risen to 2.8 million.

Reporting by Corbett B. Daly; Editing by Andrew Hay and Diane Craft