Barclays Capital (BCS) does not expect any significant changes to the Federal Housing Administration, and downplays the chance of a Treasury draw, despite headlines suggesting otherwise based on the recent actuarial report.
In fact, Barclays expects President Barack Obama’s budget estimate will show the fund will be on a stronger fiscal footing than the report states, according to the company’s Securitized Products Research.
The FHA will not need to make any Treasury draws before the end of the third quarter of 2013, leaving enough time to tackle the issue.
"We say that based on our view of how conservative the HPA assumption in the report is, as well as the fact that value from a significant amount of ongoing origination business in not reflected in it. One-off settlements could also improve the fund’s financials," Barclays stated.
The capital reserve accounted is expected to reach a 2% statutory threshold in 2017 at the latest, under current actuarial assumptions.
Click on the graph to view capital reserve projections by 2017.
The risk at hand is the possibility of Congress passing restrictive laws in response to the projected "FHA bailout."
If legislation such as this were to occur, it could lead to higher down-payment requirements, stricter underwriting and higher fees. However, this isn’t expected to happen, Barclays stated.
FHA originations are of much better quality and the FHA program continues to remain critical for first-time buyers.
"We think it is unlikely that Congress will try to negate what appears to be a nascent housing recovery," Barclays said.
Click on the graph to view mortgage insurance premium increases.