A new and extensive analysis of 2.4 million loans insured by the Federal Housing Administration in recent years shows a pattern of risky lending that could generate $20 billion in losses and harm thousands of the nation’s most vulnerable borrowers. By ignoring risks in loans it insured in 2009 and 2010, the study concludes, the F.H.A. is imperiling both borrowers and taxpayers who stand behind the agency.
The analysis emerged less than a month after the F.H.A.’s auditor submitted a troubling report on the financial soundness of its insurance fund. In mid-November, the auditor estimated that the fund, which backs $1.1 trillion in mortgages, has a value of negative $13.5 billion. In other words, if it were to stop insuring loans today, the F.H.A. fund could not cover the losses anticipated on loans it has already insured.
The new study of the potential risks in recent F.H.A.-insured loans is illuminating because it provides a level of detail, including where government-backed loans are, that is usually missing from agency analyses. In addition, the report’s loss estimates are somewhat surprising given that the loans it examined were made after the mortgage crisis became evident.
The loan analysis was conducted by Edward Pinto, a resident fellow at the American Enterprise Institute, a conservative organization. But its findings were based entirely on foreclosure estimates made by the F.H.A.’s auditor as well as detailed individual loan data like ZIP codes and borrower credit scores.
Officials at the Department of Housing and Urban Development, which oversees the F.H.A., were briefed on the study’s findings earlier this week.
George Gonzalez, a spokesman for F.H.A., disputed the findings of the analysis. “The assertion that F.H.A. is setting up potential homeowners for failure by insuring 30-year, fixed-rate, fully documented loans for underserved borrowers is not supported by the information presented,” he said. “Selective use of F.H.A. data ignores that F.H.A. has successfully provided access to mortgage financing for millions of creditworthy borrowers for almost 80 years.”
The mission of the F.H.A., created in 1934, is to provide “homeownership opportunities for first-time homebuyers and other borrowers who would not otherwise qualify for conventional mortgages on affordable terms, as well as for those who live in underserved areas where mortgages may be harder to get.” It was founded to save homeowners from default during the Great Depression.
In recent years, the F.H.A. has been increasing its participation in the market. After the mortgage crisis, traditional lenders withdrew from the business and borrowing to buy a home became much more difficult. The F.H.A., as well as Fannie Mae and Freddie Mac, have stepped in to fill that void. While Fannie and Freddie have tightened their loan standards, the F.H.A.’s underwriting requirements have remained liberal.
To receive F.H.A. backing on their loans, borrowers must have a credit score of at least 580 out of a possible 850, and they are required to put down at least 3.5 percent. F.H.A. allows the borrowers whose loans it insures to have a monthly housing debt payment of around 30 percent of their incomes.
Still, 40 percent of the 2010 loans in the F.H.A.’s insurance portfolio were made to borrowers whose total monthly debt payments were greater than 50 percent of their monthly incomes, the study found, a dangerous level.
F.H.A. does not adequately monitor the risks in the loans it backs, the study said. Moreover, it does not charge guarantee fees appropriately adjusted to reflect these risks. For example, the study notes that F.H.A. levies the same insurance premium for a borrower with a 3.5 percent down payment, a 580 credit score and a 50 percent total debt-to-income level as one who puts 20 percent down, has a 720 credit score and 25 percent debt-to-income.
The concentration of loans backed by the F.H.A. in areas of subpar family incomes is another warning flag, according to the study. Of the 2.4 million loans studied, some 44 percent were made to borrowers in ZIP codes where the median family income was below that of the corresponding metropolitan area. These loans will most likely generate foreclosure rates averaging 15 percent, the study concluded, well above the overall 9.6 percent average the F.H.A.’s auditor has projected for those years.
That so many F.H.A.-insured loans are going to at-risk families concerns Mr. Pinto. “The F.H.A.’s underwriting policies encourage low- and moderate-income families with low credit scores to make a risky financing decision,” he said, “one combining a low score with a 30-year loan term and a low down payment. This sets up for failure the very families and communities it is the F.H.A.’s mission to help.”
Because of the potential for borrower harm that Mr. Pinto sees in F.H.A.’s practices, he said the agency should reduce mortgage terms to 20 years, so that homeowners can build up equity more easily. Or the agency should insure loans only for borrowers who carry lower overall debt loads.
“The F.H.A. should set loan terms that help homeowners establish meaningful equity in their homes with the goal of ending their dependence on F.H.A. lending,” he said.
Study Shows a Pattern of Risky Loans by F.H.A.
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Study Shows a Pattern of Risky Loans by F.H.A.
