Fed, NYU Study: FHA Underestimates Mortgage Risk

More than 40 percent of Federal Housing Administration loans originated from 2007 through 2009 will be delinquent within five years and the agency’s data underestimate that risk, according to a study by the Federal Reserve Bank of New York and New York University.

The research published Thursday used loan information from data provider CoreLogic Inc. to track FHA-insured mortgages and predict default rates based on borrower characteristics.

The FHA underestimates risk because it counts refinanced mortgages as successful loan terminations, even though the same borrowers are refinancing into new mortgages backed by the government insurer, according to the paper published on the website of the National Bureau of Economic Research. The researchers computed the risk of default by linking all of the loans connected to each borrower.

“Having such a very large fraction of the people who borrow from you become delinquent could never be regarded as good public policy,” said Andrew Caplin, a professor of economics at New York University and one of the study’s authors.

The study is the latest in a series of critiques by Caplin and others of the way the FHA tracks its financial health. The agency, which took on more loans as private insurers left the market in the aftermath of the 2008 financial crisis, guarantees about $1.1 trillion in home loans.

FHA officials didn’t immediately respond to a request for comment. The FHA has defended its financial performance data and stressed that the quality of its loans is improving.

‘Credit Quality’

“Credit quality of loans the agency has insured over the past two years is the highest it has ever been,” the agency said a fact sheet posted on its website in March. “Early- payment default rates and current-period serious delinquency rates are a fraction of those seen in earlier books at the same point in their seasoning.”

Caplin said he is urging the agency to change its model for computing default risk.

“In the current method, we’re not building a future,” he said. “If you can’t even look at the data right, how can you possibly design the housing-finance institutions of the future?”