Professional Documents
Culture Documents
PRESENTED AT THE 2013 AMERICAN MORTGAGE CONFERENCE SPONSORED BY THE NORTH CAROLINA BANKERS ASSOCIATION
nightmareatfha.com
|1
1946-1967
1979-2000 2001-2012
the FHAs rate averaged 96%of the VAs the FHAs rate averaged 118% of the VAs the FHAs rate averaged 197% of the VAs
9% 8% 7% 6% 5% 4% 3% 2% 1% 0%
Sources: 1946-1967: John P. Herzog and James S. Earley, Home Mortgage Delinquency and Foreclosure (Cambridge, MA: National Bureau of Economic Research, 1970), www.nber.org/books/herz70-1 and 1979-2012: MBA National Delinquency Survey. All data year-end, except 2012 data, which is Q2:2012.
1946 1949 1952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 nightmareatfha.com
|2
FHA projected cumulative claim ratenote: annual claim rates do not exclude streamline/FHA-toFHA refinances (right axis)
FHA adjusted loan count (excludes streamline/FHA-FHA refi from 1983 on) left axis
1,000,000
800,000 600,000
20%
Sources:
15%
Projected annual cumulative claim rate and streamline/FHA-to-FHA refinances: Annual FHA Actuarial Studies
Number of claims by year = loan count (includes streamline/FHA-to-FHA refinances) x claim rate
0%
nightmareatfha.com
|3
Excessive foreclosure rates Poor property management and disposition Excessive loan limits Imprudent appraisal practices 100% guarantee promotes misaligned incentives Poor underwriting practices impact first time, working class and minority borrowers and their communities
nightmareatfha.com
|4
20%
5%
The first (FHA @41-45% DTI) and second bars (VA @41-45% DTI ) for each group show how VA underwritten loans perform relative to FHA loans in similar FICO bands and DTIs. The VAs performance across these bands averages about 67% of the FHAs. The third bar for each group shows the VAs performance for 51-55% DTI, which average about 80% of FHAs rate for 41-45% DTI loans.
nightmareatfha.com
|5
FHA VERSUS VA
AFRICAN AMERICAN LOAN GUARANTEE PERCENTAGES
The VA serves a greater percentage of African American families buying a home than FHA
15% FHA African American Percentage VA African American Percentage Source: Mortgage Bankers Association, derived from Home Mortgage Disclosure Act.
14%
13% 12%
11%
10% 9%
8%
7% 6%
2004
2005
2006
2007
2008
2009
2010
2011
nightmareatfha.com
|6
40%
From a recent study where 19 of 22 cities had higher FHA projected foreclosure rates in low-income zip codes than in middleincome zip codes. Replicates the National Training and Information Centers 2002 study for the same 22 cities. That study found 21 of 22 cities had higher FHA loan default rates in low-income census tracts than in middleincome census tracts.
nightmareatfha.com
Richmond, VA
NYC, Queens
Philadelphia, PA
Washington, DC
Buffalo, NY
Memphis, TN
Baltimore, MD
Cincinnati, OH
Birmingham, AL
Los Angeles, CA
Columbus, OH
NYC, Brooklyn
Rochester, NY
Syracuse, NY
Newark, NJ
Chicago, IL
Detroit, MI
Miami, FL
Dallas, TX
Cleveland, OH
Indianapolis, IN
Trenton, NJ
Atlanta, GA
NYC, Bronx
|7
FHA Loan Projected Foreclosure Rate Minority Zip Code vs. White Zip Code Areas (21 cities plus 3 New York boroughs)
40% 35%
White Rate
From a recent study where 19 of 22 cities had higher FHA projected foreclosure rates in minority zip codes than in white zip codes. Replicates the National Training and Information Centers 2002 study for the same 22 cities. That study found 19 of 22 cities had higher FHA loan default rates in minority census tracts than in white census tracts.
nightmareatfha.com
15%
10% 5% 0%
NYC, Brooklyn
Los Angeles, CA
Philadelphia, PA
Richmond, VA
Newark, NJ
NYC, Queens
Syracuse, NY
Buffalo, NY
Washington, DC
Birmingham, AL
Cleveland, OH
Memphis, TN
Chicago, IL
Detroit, MI
Miami, FL
Dallas, TX
Baltimore, MD
Indianapolis, IN
Cincinnati, OH
Columbus, OH
Rochester, NY
Trenton, NJ
Atlanta, GA
NYC, Bronx
|8
nightmareatfha.com
|9
40%
35%
30%
90+ Rate 25%
20%
15%
10%
5%
0%
Loans to FHA borrowers in zip codes with a higher fraud risk score (FRS) perform worse than loans in zips with a lower FRS, even when borrower risk factors such as FICO score, down payment, and DTI ratio are held constant. An FHA borrower in a zip code in the 4th quartile (the 25% of the zips with the highest FRS), on average, had a 31% higher likelihood of being 90+ days delinquent compared to a borrower with the same risk factors living in a zip in the 1st quartile (the 25% of the zips with the lowest FRS). nightmareatfha.com | 11
nightmareatfha.com | 12
nightmareatfha.com | 13
ALIGNMENT OF INCENTIVES
Contributes greatly to the VAs success:
Combines public sector mission of benefiting the veteran backed by public sector guarantee. Alignment of financial interests:
25% guaranty limit aligns originator, servicer, issuer and Ginnie with the VA and homeowner Doing it right from start to finish is in everyones interest Allows the VA to address issues within this rationalized structure, rather than responding with ad hoc solutions Origination, securitization, servicing
Utilizes processes to reduce risk and fraud The lack of properly aligned incentives helps explains why, notwithstanding the magnitude and persistency of FHAs problems, efforts at reform have failed.
nightmareatfha.com
14
Debts and obligations (includes job related expenses such as child care)
Family living expenses Residual income needs
The resulting debt-to-income ratio (DTI) is secondary to residual income as an underwriting factor.
nightmareatfha.com | 15
APPRAISER PANELS
Alignment of incentives:
Panel selected based on experience and geographical competence (VA) Size: 4500 (VA) vs. 55,000 (FHA). VA did 40% of the FHAs volume (2012)
Reopening of local panel based on need, additions based on competence (VA) 2012: goal of increasing VA panel size from 4600 to 5800 , now at 5200
Assignment based on rotation (VA) vs. lender selection (FHA) Quality control (VA)
VA staff appraisers or designated lenders Minimum of 10% of work is field reviewed
nightmareatfha.com | 16
FHAs loss rate is an estimated 5 times the VAs (2 times the incidence and 2.5 times the severity).
The VA charges 1/3 FHAs premium (present value basis). VA Issuers absorb 1.6 times the overall loss rate compared to FHA issuers for the same fee.
nightmareatfha.com | 17
VA has experienced substantially lower serious delinquency rates than the FHA for decades and are currently half the FHA rate (2001-2012).
nightmareatfha.com | 18
Concessions of >3% subject working class families and neighborhoods to needless foreclosure risk.
nightmareatfha.com | 19
nightmareatfha.com | 20