Distressed sales tend to drive down home prices. Using the FHFA index "is just one of the many choices FHA makes that are completely unjustified and that coincidentally make the situation appear better than it is," Caplin said in an interview.
Integrated Financial Engineering's Dennis said he "wouldn't argue that the FHFA index is perfect."
"Some have suggested that the FHA use an FHA-specific home-price index," he said.
One change in the FHA's approach this year may help improve the quality of its mortgages. It will spend more time and money checking for potential wrongdoing by mortgage originators, said Helen R. Kanovsky, HUD's general counsel.
'Limited Resources'
Until recently, FHA officials chose to direct their "limited resources" to examining loan servicing rather than loan origination, Kanovsky said. In general, the agency trusts lenders to certify the quality of mortgages it guarantees and to report paperwork flaws or possible fraud.
On Feb. 9, Charlotte, North Carolina-based Bank of America Corp. agreed to pay $1 billion to settle claims it failed to do so, while on Feb. 15 Citigroup Inc. admitted it certified loans for FHA insurance that didn't qualify and will forfeit $158 million. Some of that money will compensate the FHA for claims it paid for defaulted home loans certified by Citigroup and Bank of America's Countrywide mortgage unit.
The FHA can negotiate indemnification agreements in which the loan originator reimburses the agency for losses to its insurance fund. It typically requests indemnifications after a loan goes bad or when there are basic underwriting problems with the mortgage, such as missing paperwork or fraud.
Over the last seven years, the agency has averaged 1,282 indemnification agreements a year out of an annual average of 993,355 total loans guaranteed -- a little more than 0.1 percent.