Banks Face New Multibillion-Dollar Mortgage Slam: Analyst

Considering the brewing outcry in Washington over the Fannie Mae, Freddie Mac and their regulator, the Federal Housing Finance Agency, Miller believes that "the FHA needs to avoid tapping into its credit line to prevent comparisons to the GSEs," and should its various improvements to risk management and strengthened loan underwriting requirements prove inadequate, "the industry fears the possibility that the agency could turn to widespread claim audits in order to recoup losses."

Reluctance by the threatened banks to lend through FHFA makes it "no surprise that borrowers are finding it harder to obtain loans," emphasizing the tightrope walk that the FHA and the Obama Administration is waling.

While losses from loans insured by the FHFA through the first quarter of 2009 were continuing to "place a significant strain" on the agency's resources and were expected "to reach $26 billion within a few more years," the agency said that loans insured during its fiscal 2010 and 2011 were "expected to be very profitable, providing significant net revenues to offset losses on earlier books."

In a nod to President Obama, the FHA said that the Obama Administration's "sweeping reforms" had "improved loan quality, strengthened lender enforcement, and helped to protect future loan performance." The agency said that "loans insured to-date under the Obama Administration are providing $18 billion in economic value for the MMI Fund," and forecasted that its Fiscal 2012 loan book would "add an additional $9 billion in economic value" to the MMI.

Among the Obama Administration's reforms to FHA have been improvements to risk management, increased enforcement of FHA rules, strengthening of net worth requirements for FHA lenders, increased mortgage insurance premiums and "specifically, a minimum down payment of 10 percent" required for "borrowers with credit scores below 580," while "applicants with credit scores below 500 are no longer eligible for FHA insurance."

The agency's traditional down payment requirement for most borrowers was just 3%.

-- Written by Philip van Doorn in Jupiter, Fla.

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