The U.S. Department of Housing & Urban Development (HUD) has released its Annual Report to Congress Regarding the Financial Status of the FHA Mutual Mortgage Insurance Fund: Fiscal Year 2011 on the financial status of the Federal Housing Administration (FHA) Mutual Mortgage Insurance (MMI) Fund, the backbone of the FHA single-family and reverse mortgage programs. In reporting on findings of the annual independent actuarial study, HUD indicates that, in the midst of continued weakness in housing markets across the county, the MMI Fund capital ratio remains positive this year at 0.24 percent. With new risk controls and premiums put in place by the Obama Administration, the independent actuaries predict the Fund will return to the Congressionally-mandated threshold of two percent capital more quickly than was projected by last year’s review. The economic value of new insurance endorsements in FY 2011 for the Fund was nearly double that of FY 2010 endorsements, being close to $11 billion.
As was the case last year, the new actuarial study shows that FHA is expected to sustain significant losses from loans insured prior to 2009, and thus its capital reserve remains below the congressionally mandated threshold of two percent of total insurance-in-force. However, the actuaries’ report concludes that, barring a further significant downturn in home prices, the MMI Fund will start to rebuild capital in 2012, and return to a level of two percent by 2014 – outpacing last year’s prediction. The actions taken by this Administration have put FHA into a position where the actuaries expect rapid growth in capital once the housing market begins a broad-based recovery.
“In the midst of a tough housing market the FHA MMI Fund continues to be actuarially sound,” said Acting FHA Commissioner Carol Galante. “Because of the Obama Administration’s strategy to protect the FHA Fund—tightening of risk controls, increased premiums to stabilize near-term finances, and expanded loss mitigation assistance to avoid unnecessary claims—this past year’s endorsements had the highest credit quality ever recorded, and will yield historically high levels of net receipts in the years ahead.”
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 0.24 percent of total insurance-in-force this year, falling from 0.50 percent in 2010. FHA’s total liquid assets (cash plus investments) grew by $800 million since last year, to $33.7 billion. That amount is $1.9 billion higher than at the end of FY 2009, and is also $7.7 billion higher than was predicted last year by the independent actuaries. At the same time, the economic net worth of the Fund fell by $2.1 billion this year, from $4.7 billion to $2.6 billion, as FHA continued to build loss reserves to prepare for greater claims in the coming years.
"I am pleased to report that even while the Federal Housing Administration has faced the most severe economic conditions since its creation after the Great Depression in 1934, it continues to remain remarkably resilient," said HUD Secretary Shaun Donovan. "This is no accident. As a result of policies this Administration has put in place, we are creating a strong foundation for recovery of FHA’s capital position as the economy grows more strongly."
Losses on loans insured through the first quarter of fiscal year 2009 continue to place a significant strain on the Fund and are expected to reach $26 billion within a few more years. Though they were prohibited in 2009, the ongoing effect of so-called “seller-funded downpayment assistance loans” is still significant. The net expected cost of those loans, as projected by the independent actuaries, grew by $1.8 billion over the past year to $14.1 billion. Conversely, the actuaries found that the FY2010 and FY2011 books are expected to be very profitable, providing significant net revenues to offset losses on earlier books. Loans insured to-date under the Obama Administration are providing $18 billion in economic value for the MMI Fund. Under the base-case forecast used by the independent actuaries, the FY 2012 book will add an additional $9 billion in economic value to the Fund.
"It is clear that the persistent troubles in the economy and real estate markets are continuing to impact FHA's financial reserves, and given FHA's mission of providing access to mortgage credit to lower income and first time homebuyers, it should be of little surprise that its reserves are being stressed," said Michael W. Young, chairman of the Mortgage Bankers Association (MBA). "That FHA continues to remain net-positive is a testament to the numerous credit policy and operational changes implemented over the last couple of years to stabilize the fund, while the agency has played a larger role than ever as one of the few guarantors of mortgage credit for millions of homebuyers across America."
Since taking office in 2009, the Obama Administration has instituted sweeping reforms to strengthen the MMI Fund. New policies have improved loan quality, strengthened lender enforcement, and helped to protect future loan performance. This has been the most comprehensive update to FHA credit policies, risk management, lender monitoring, and consumer protections in its history. To emphasize this new commitment to risk management, HUD hired the first-ever FHA 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. HUD also increased enforcement of FHA lenders, eliminated approval for loan correspondents, and increased net worth requirements for lenders wanting to underwrite FHA loans. Additionally, HUD introduced a new premium structure that better aligns with current market conditions, and it set underwriting minimums that combine credit score and down payment requirements to balance risk management with broad access to housing credit for borrowers who have historically met FHA credit quality standards. Specifically, a minimum down payment of 10 percent 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 this past year, FHA:
►Served more than 1.2 million households and insured $218 billion in single-family mortgages, bringing the active single family portfolio to more than $1 trillion.
►Enabled more than 585,000 families to become homeowners for the first time. This represents 56 percent of all first-time homebuyers in the nation.
►Helped more than 362,000 families avoid foreclosure through loss mitigation actions.
►Helped 440,000 families to refinance their mortgage at lower interest rates, saving households an average of more than $160 per month.
►Provided access to credit for close to 40 percent of all homebuyers needing mortgages, including 60 percent of all African-American and Hispanic homebuyers.
►Reduced mortgage payments for 142,000 distressed homeowners through loan modifications. While standard modifications reduced typical payment burdens by 11 percent ($85), FHA Home Affordable Modification Program (HAMP) actions reduced average mortgage costs by 24 percent ($218).
"FHA plays an important countercyclical role in the housing market, with its greatest contributions coming during those times of market stress, like those we have seen in recent years," said Young. "Without FHA's support, our housing market would be in far worse shape than it is today."