The trade group U.S. Mortgage Insurers (USMI) is calling for the modernization of the Federal Housing Administration’s “capital ratio,” arguing that the program should be held to the same standard as private mortgage insurers.
Since 1990, the FHA’s mutual mortgage insurance fund has been required by law to maintain a positive economic value of 2% going forward to help cover any unexpected losses. The requirement is often referred to as the agency’s 2% capital ratio.
That was 35 years ago, and as USMI notes, “a lot has changed since then.”
One of the major changes has been an update to risk-based capital frameworks developed in the aftermath of the financial crisis of 2008 to ensure the housing finance system remains strong and resilient in the face of stress events.
Yet, “to this day,” the trade USMI says, “the 2% Capital Ratio remains the same.”
The FHA will soon make its annual report to Congress detailing the financial status of the MMIF as of the end of the fiscal year. To determine “the true fiscal condition” of the fund and FHA’s forward mortgage program, USMI hired an independent firm to do its own evaluation.
Milliman, the third-party actuarial firm engaged by the trade group, estimated the risk-based capital FHA would be required to hold if it was subject to the same capital frameworks as private mortgage insurers and Fannie Mae and Freddie Mac.
The firm found that if the FHA was held to the same capital standard private insurers must meet to insure loans acquired by the GSEs in the conventional market, FHA would run a $31.7 billion shortfall.
At the same time, it found that the FHA would need to hold $50 billion more to meet the GSE capital framework’s minimum requirement if applied to FHA’s book of business.
To ensure that the FHA remains strong and well-capitalized so it can continue to play its important role in the housing finance system, USMI says Congress should consider replacing the 2% Capital Ratio requirement with an updated stress-based, loan-level risk-weighted standard.
That change, the trade group says, “would ensure FHA has sufficient capital to meet its obligations during a time of severe stress, similar to how the GSEs and the private MI industry have built safeguards to ensure sufficient capital levels to withstand downturns.”
