Reassessing FHA Risk
Federal Housing Administration (FHA) insurance has doubled over the past two years and is projected to redouble to $1.5 trillion over the next five. Despite clear signs of strain in the FHA's Mutual Mortgage Insurance Fund, a recent actuarial review indicates that the FHA will not need any form of government support. We identify four risk factors that make such a funding request more likely; the review underestimates how many FHA borrowers are underwater and in economic distress; it uses measures of house values that lower loss estimates; it does not incorporate early-warning signals of future losses that are available from mortgage delinquency; and it ignores potential risks associated with recent down-payment assistant programs despite higher losses on previous programs of this type. We propose measures that could be taken to improve the predictive accuracy of FHA risk assessment.
We thank Gunnar Blix and Damien Weldon of First American CoreLogic (FACL) for their profound support at all stages of the project, as well as FRBNY and NYU for research support. We thank also Mark Fleming, Charlie Freeman, Ben Graboske, Joseph Gyourko, Andy Haughwout, George Livermore, Roy Lowrance, Lori Ordover, Steve Schroeder, Trivikraman Thampy and Ruth Wyatt for essential input and guidance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.