RISMEDIA, November 17, 2010—The Federal Housing Administration (FHA) released its annual report to Congress on the financial status of its Mutual Mortgage Insurance (MMI) Fund, FHA’s principal insurance account that includes all single-family and reverse mortgage activity. FHA’s study finds that since last year, the capital reserve ratio held steady, insurance claims declined significantly, and the economic value of FHA’s single-family insurance program grew by more than $1 billion—from $3.6 billion in 2009 to $4.7 billion in 2010.
Like last year’s report to Congress, this accounting shows that FHA is sustaining significant losses from loans insured prior to 2009 and its capital reserve ratio remains below the congressionally mandated threshold of 2% of all insurance-in-force. However, the report concludes that under conservative assumptions of future growth of home prices, and without any new policy actions, FHA’s capital ratio is expected to approach 2% in 2014 and exceed the statutory requirement in 2015.
“It’s clear that FHA is in a stronger position today than we were just one year ago,” said FHA Commissioner David H. Stevens. “While we are not yet completely out of the woods, based on the evidence we’re seeing, FHA is weathering the economic storm while helping to create a firm foundation for our nation’s recovery.”
FHA’s capital reserve ratio measures reserves in excess of those needed to cover projected losses over the next 30 years. The independent actuarial reviews of the MMI Fund estimate FHA’s capital reserve ratio to be 0.50% of total insurance-in-force this year, falling fractionally from 0.53% in 2009. The difference is primarily attributed to the use of much more conservative assumptions regarding future house price growth than were used last year, which also resulted in an $8.5 billion decrease in economic value. However, that decrease was offset by a variety of factors, including an $8.7 billion increase in value due to better credit quality, loan performance, and the premium increase implemented earlier this year.
Due in large part to the performance of recently originated loans, FHA’s total capital resources increased by $1.5 billion since last year, to $33.3 billion, and are at their highest level ever—$5.5 billion greater than predicted last year. If the economy were to suffer a further significant downturn, recovery of the capital ratio could be delayed beyond the projected timeframe. However, even in the actuaries’ worst-case stress test scenario, FHA’s capital resources remain sufficient to cover projected claim losses and FHA would not require a taxpayer subsidy, an improvement over last year’s assessment and due to new loans having higher credit quality than had been anticipated.
Loans insured before 2009 are responsible for 70% of the expected single family loan losses. Though they are now prohibited, so-called “seller-financed down payment assistance loans” produced $6.6 billion in claims to-date and may ultimately cost FHA $13.6 billion. Without these seller-financed loans, FHA’s capital ratio would be above the congressionally mandated 2% threshold. Conversely, loans insured since 2009 earned $4.8 billion in economic value to the MMI Fund and are estimated to generate $28.3 billion in economic value by 2016. Expected economic value of FY 2010 and FY 2011 loans alone are estimated to reach $11 billion.
Insurance claim expenses in FY 2010 were 21% lower than predicted last year. Even before last year’s actuarial study, FHA management began instituting sweeping reforms to strengthen the MMI Fund. These policies have improved loan quality, strengthened lender enforcement, and helped to protect future performance. As a result, the FY 2010 and future books-of-business are expected to generate significant amounts of net capital resources that will help pay losses on earlier books and rebuild the capital position of the MMI Fund.
Since July 2009, FHA implemented the most sweeping reforms to its credit policies, risk management, lender enforcement, and consumer protections in its history. FHA hired its first chief risk officer and established a permanent risk office to expand FHA’s capacity to assess financial and operational risk, perform more sophisticated data analysis, and respond to market developments. FHA also increased enforcement of its lenders, changed the approval process making lenders liable for oversight of their mortgage brokers, and strengthened FHA’s lender approval requirements.
In addition, FHA eliminated approval for loan correspondents and increased net worth requirements for lenders. FHA introduced a new premium structure that is more in line with private mortgage insurers’ pricing, and is estimated to provide approximately $300 million per month of additional capital to the MMI Fund. Furthermore, FHA has changed its credit score and down payment requirements to ensure that FHA provides access to borrowers who have historically performed well. Specifically, a minimum down payment of 10% is now required of borrowers with credit scores below 580 and applicants with credit scores below 500 are no longer eligible for FHA insurance.
Over the past year, FHA:
-Served more than 1.75 million households by insuring $319 billion in single-family mortgages. This volume was second only to FY 2009.
-Enabled 882,000 families to become homeowners for the first time. This represents one-third of all first-time buyers in the nation
-Helped more than 450,000 families avoid foreclosure through loss mitigation actions.
-Helped 556,000 families to refinance their mortgage at lower interest rates, saving households an average of more than $140 per month.
-Provided access to credit for close to 40% of purchase mortgages including 60% of all African-American and Hispanic home buyers.
-Helped more than 450,000 families avoid foreclosure through loss mitigation actions.For more information, visit www.hud.gov.
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