Stress test for FHA are now in the works

FHA Undergoes Stress Tests

It's about time some one stepped up and called for a look see at the rate (velocity) and maybe also the type of loans being made by the people who gave us the crash. FHA loans with little or no down have been a major contributor in the holding up of current home values. However, a little Déjà Vue might be in order as it pretty easy to understand that high loan to value loans were a major player in giving us this subprime mess



This year’s independent review of the Federal Housing Administration’s reserves makes one thing clear: the agency is burning through its cash reserves at a rate that leaves little room for error.

The annual actuarial review, which was released last week, estimates how much cash the FHA will have on hand after paying for expected losses over the next 30 years. The agency currently has around $31 billion in cash, but the latest review projects that under the baseline scenario, the FHA will need to pay $27 billion in claims on loans it has insured, leaving just $3.6 billion in its reserve account, or around 0.5% of all the outstanding loans it has insured.

This year, the FHA also asked the statisticians to conduct two “stress test” scenarios that look at how the agency’s reserves would hold up if the economy tanks again. “There’s a significant chance that housing recovery we’ve seen doesn’t continue,” Shaun Donovan, secretary for Housing and Urban Development, said. “And I think we need to continue to be prepared for a range of different scenarios.”

Under a “second severe recession” scenario, which assumes 11% unemployment and a 34% peak-to-trough decline in home prices (down from the 21% that’s included in the baseline scenario), the agency would see almost all of its capital depleted by 2013.

The most severe scenario, they call it a “depression,” which assumes 12.5% unemployment and a 50% peak-to-trough decline in the Case-Shiller 10-city home price index, would exhaust the agency’s reserves by 2011, and the agency wouldn’t return to positive territory for several years.

The FHA won’t pay out all of its $27 billion in projected losses at once because that estimate looks at potential losses for the next 30 years. Next year, for example, projects that the FHA will have to pay out $13.5 billion, bringing its reserves down to $18 billion. The FHA predicts it will make money on loans insured in the 2010 fiscal year, which began Oct. 1, but the annual review doesn’t account for the profitability (or losses) of future years.

A separate audit of the agency’s financial statements, also completed last week, asks whether the current modeling is the best way of measuring the agency’s health, and notes that the annual review “may be optimistic due to an inherent design assumption, may not fully reflect the potential impact of recent events, and is extremely sensitive to changes in house price forecasts.”