FHA Finances Said to Rebound on Higher Premiums, Loan Volume

The Federal Housing Administration may end the fiscal year with about $3 billion in reserves after premium increases and rising loan volume offset a previously forecast shortfall, people with knowledge of the numbers said.

U.S. Department of Housing and Urban Development officials cited the turnaround to lawmakers today as Democrats push for a Senate vote on Carol Galante’s nomination to head the agency, according to the people, who declined to be identified because the discussions are private. Galante, 57, has been acting head of FHA, which is overseen by HUD, since July 2011.

“Carol Galante has taken action to change the way that HUD and FHA do business, including steps to help FHA better manage risk,” according to a HUD document that has been circulating among members of Congress.

The improved picture has emerged after months of turmoil at FHA, which in February was set to ask for a $688 million in a taxpayer subsidy that would have been the first in its 80-year history. The need for a subsidy was eliminated when the agency received nearly $1 billion from a legal settlement with mortgage servicers over flawed foreclosure practices.

FHA’s troubles stemmed from rising defaults on mortgages it insured as it took an expanded role in the market during the peak years of the housing bubble. The agency now insures about 7.1 million loans with outstanding balances totaling more than $1 trillion, triple the amount it held five years ago.

Republican Opposition

FHA’s finances have continued to improve, according to the HUD documents sent to urge senators to confirm Galante before they leave for summer recess. Republicans including Senator David Vitter of Louisiana have opposed her nomination on the grounds that the agency’s finances are shaky.

Vitter still opposes the nomination, Luke Bolar, a spokesman for the senator, said today in an e-mail.

Senator Tim Johnson, the South Dakota Democrat who leads the Senate Banking Committee, reaffirmed his support and called for bipartisan backing for Galante.

“I hope my Republican colleagues will not deny FHA a confirmed commissioner at a time when managing the book of business from 2000 through 2008 requires an experienced leader,” Johnson said in a statement.

The agency hasn’t had a permanent leader since David H. Stevens, 55, quit to lead the Mortgage Bankers Association in March 2011. Galante, who was a developer of affordable housing before joining HUD in 2009, took over after serving as FHA’s head of multifamily housing.

‘Overall Uncertainty’

“While Acting Commissioner Galante has made significant strides in improving the long-term health and position of the FHA, continuing in an acting capacity merely adds to overall uncertainty in the market,” HUD said in the documents.

Loan volume and premium revenue have surged since FHA increased insurance premiums on new single-family loans in April by 75 basis points to 1.75 percent of loan amount. At the same time, to encourage refinancing of loans originated before June 2009, FHA cut up-front premiums in its so-called streamline refinance program to 0.01 percent of loan amount from 1 percent and cut annual fees to 0.55 percent from 1.15.

Single-family insurance applications received by FHA in May rose by 4.5 percent from a year earlier, to about 124,000, according to agency data. That included 25,000 streamline refinance applications, up 225 percent from a year earlier.

The fee increase came after an audit in November showed agency reserves had fallen to a record $2.6 billion. The FHA’s capital ratio, a measure of its ability to withstand losses, was 0.24 percent in the year ended Sept. 30, the third straight year it failed to meet the legal minimum of 2 percent.

Positive Outlook

The new numbers show the agency’a outlook is positive, said Brian Chappelle, a bank consultant with Potomac Partners in Washington.

“With each passing day, FHA’s financial condition is improving as the problem loans from 2005-2008 become a much smaller percentage (under 15%) of FHA’s portfolio,” Chappelle said in an e-mail.

Edward Pinto, a housing specialist at the American Enterprise Institute and a frequent critic of FHA’s accounting practices, said the agency’s financial condition could deteriorate before the fiscal year ends Sept. 30.

“We’ll see what actually happens,” Pinto said. “In the past they have had slippage between what they say in August and what happens in October or November.”

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