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FHA Reserves: The Rest of the Story

Jeff Mifsud
Apr 19, 2013

This year’s federally-mandated annual independent Federal Housing Administration (FHA) audit was completed recently, and not surprisingly, every media channel I saw (The New York Times, Los Angeles Times, and Wall Street Journal to name a few) focused on the single piece of negative data that was there. Am I surprised? No. Does this type of coverage on housing help the recovery and instill confidence in homebuyers and sellers? No. I did my own analysis of the 235-page audit performed by Integrated Financial Engineering Inc. based in Rockville, Md. Below, I will highlight some of what I found, which may give you a different perspective on the report. The first thing to bring to your attention is this: The audit gave FHA insurance fund projections through the year 2019. The media only focused on the deficit that is estimated to occur this month, December of 2012. Well, what about the future years? The audit states that: “Both the economic value and the Insurance In Force (IIF) portion of the Fund are expected to increase each year over the next seven years … Our current projections indicate that the Fund's economic value will increase in the future, rising by an average of $9.68 billion per year through the next 7 years and reach $54.25 billion by the end of FY 2019.” In other words, according to the report, the fund is actually projected to begin strengthening through 2013 and beyond. Hmmm. That paints a different picture than the media, doesn’t it? The report also stated that” “We project that there is approximately a five percent chance that the Fund’s capital resources could turn negative during the next seven years.” Stated another way, there is a 95 percent chance that the fund will be positive over the next seven years. This sounds like a pretty positive projection to me! But then again, I’m not looking at it through the negative lens of the larger media channels which only see the negative five percent chance. Rates forecast For those of you who like to hear a prediction on what future interest rates will do, the audit quoted Moody’s forecast of rapid rising interest rates between 2013-2015, with rates stabilizing sometime in 2016 and dropping again between 2016-2017. For those of you who are overwhelmed with the volume of refinances, thus ignoring your referral partners for purchase business, take heed. This, as another indicator, that it behooves you to take the time to develop your strategy for generating purchase transactions. Take a look at what percentage your pipeline is refinance business. Is it 65 percent, maybe 75 percent? Now ask yourself what your paycheck would look like with a 65-75 percent decrease. That might hurt a bit … yes? In my very first week in the business back in 1995, my manager told me in no uncertain terms, “If you want to be in this business long-term, you have to have purchase business … regardless of what rates do, people always have a need to buy and sell homes.” I was taught to treat refinance transactions as “extra income” and to focus on the purchase market. I took that to heart and from day one I was always focused more on purchase business. During nearly every refinance boom, I always took the time to make appointments with real estate agents. My experience was that it was pretty easy to get appointments because my competition was not out in the field creating new relationships; they were cherry-picking the easy business generated by the refi boom. Not that I didn’t pick cherries too, mind you, but it so happens that during the one refinance boom during which I focused more on refinance business, while neglecting the purchase market, I paid for it dearly after the rates increased again and refinance business plummeted. I had to struggle mightily to get my purchase business back up. Learn from my mistake, and make sure you have your purchase lead generation systems in place now, so you can easily replace your refinance volume when it decreases! Top FHA states For those of you who might be curious about what states produce the highest FHA volume, the report gives the following information: The top 10 FHA states in volume originated in 2012 are as follows, (1) California, (2) Texas, (3) New York, (4) Florida, (5) New Jersey, (6) Virginia, (7) Pennsylvania, (8) Maryland, (9) Illinois and (10) Colorado. This data is important for those of you that do business on a national level and are wondering where you can originate more FHA loans. FHA market share Now to take a look at purchase market data: According to the audit, FHA accounted for approximately 13.5 percent of the purchase market in 2000, and dipped to a low of 3.77 percent in 2006 (remember the 100 percent LTV 580 stated-income?). It then climbed back up to 15.78 percent as of May 2012. Historically, FHA is usually about 10 percent of the total market volume (including both refinances and purchases). The report predicts that at some point (if the other agencies return to former market share), the FHA market share will likely again decrease to the 10 percent level. If, however, the recovery of the other agencies remains impaired, then FHA will remain around 15 percent of the market share. Credit scores Over the last three years, approximately 90 percent of all FHA loans had credit scores over 640, with about 60 percent between 680-850, and 30 percent between 640-679. Just under 10 percent of all FHA loans had scores between 600-639. Only about 0.5 percent had scores between 560-599. For those of you doing consumer direct marketing for FHA loans, this data is tells you some important information. For starters, it tells you not to waste your money marketing to demographics that will have anything less than 640! And secondly, it tells you that not many loans below 640 are getting approved. There are lenders that accept scores of 580, and the direct marketing companies will likely be able to generate a lot of leads for you in the 580-620 range. Is it a good use of your time and money? Likely not. One thing is clear … in any rate environment and in any economy, there will always be potential homebuyers with good jobs that want to buy homes. If you market yourself as an FHA specialist and create your brand as an FHA expert among real estate agents, you will always have loans in your pipeline. According to the 2012 NAR Profile of Home Buyers and Sellers, first-time homebuyers (FTHB) accounted for about 40 percent of all purchases, and in 2011 accounted for 37 percent. Given this data, having a marketing channel for FTHBs is a way to recession-proof your mortgage practice. At the height of the crash, I trained a lot of mortgage loan originators (MLOs) who had niches in the jumbo market. They were trying to shift in to the FTHB market to survive. Learn from the past and consider creating a FTHB niche to enhance the foundation of your business. For FHA marketing help and to stay current on FHA changes, you can subscribe to “The FHA Originator,” a service I created to help MLOs brand themselves as FHA experts among FHA referral sources, go to to check it out. Wishing you a year of growth and prosperity in the coming year … Go FHA! Jeff Mifsud is founder of Michigan-based Mortgage Seminars LLC, a former FHA underwriter with 15-plus years of experience originating FHA loans, an FHA expert for and creator of The FHA Originator, a monthly FHA newsletter. Jeff may be reached by phone at (248) 403-8181 or visit
Apr 19, 2013
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