The Federal Housing Administration revealed last month that its program was in good health, operating with a positive subsidy of $34.86 billion in its Mutual Mortgage Insurance Fund – an $8 billion jump from last year.
A recent report by independent think tank the Urban Institute affirmed that the FHA, which occupies 12% of the mortgage market, continues to be “strong and profitable” for taxpayers, highlighting four trends to watch in the FHA’s mortgage portfolio to measure its performance in the year ahead.
Trend: A healthy housing market has enhanced the FHA’s performance.
Home prices have increased an average of 7% in the last four years, according to the report, providing a healthy boost to the MMI Fund, which saw its net worth increase from 2.18 to 2.76 in the past year. The fund also garnered $209 billion in new FHA mortgages, which is expected to boost revenue in the years ahead.
Trend: Down payment assistance is on the rise.
The share of FHA borrowers receiving down payment assistance – either from relatives, government entities or other parties – has grown from 30% to 39% over the past five years. The Urban Institute points out that while some DPA programs require borrower education and do not markup interest rates, others are more risky.
“As more borrowers come to rely upon these programs, it is critical to collect more data on the various DPA programs, both for the health of the MMI Fund and for the financial health of future borrowers,” the authors wrote.
Trend: Cash-out refinances are climbing.
While overall refinances decreased from 2017 to 2018, cash-out refinances increased from 142,000 to 152,000 loans. Of all 2018 refinance activity, cash-outs comprised 35%, up from 23% the year before.
“While these loans may be profitable for the FHA and allow homeowners to tap wealth,” the authors wrote, “this trend bears watching.”
Trend: Credit access is expanding.
The Urban Institute notes that credit scores are drifting downward while debt-to-income ratios are trending upward, but says this trend is not too concerning.
“The former largely reflects a return to more normal levels from a market that had become overly tight after the financial crisis, and the latter reflects increases in house prices and interest rates,” the report states.
While these two factors do increase the FHA’s risk, the authors say they are part of the program’s cyclical nature, although they also point out that the increased default brought on by this type of risk layering is worrisome.