The U.S. Department of Housing and
Urban Development (HUD) said today that the capital reserve ratio of the Federal
Housing Administration's (FHA) Mutual Mortgage Insurance (MMI) Fund fell to a
negative balance in FY2012. The Fund,
which is Congressionally mandated to maintain a capital reserve ratio of 2
percent is now at -1.44 percent, representing a negative value of $16.3
billion. The news came with the release
of HUD's annual report to Congress on the financial condition of the FHA MMI
Fund which contains an independent actuarial study of the fund.
The actuary's findings do not mean
that FHA has insufficient cash to pay insurance claims, a current operating
deficit, or will need to immediately draw funds from the Treasury. Any Treasury draw would be determined, not by
the economic assumptions of the actuarial review but by those used in the
President's FY2014 budget proposal due in February. A final determination on a draw will not be
made until next September, and HUD said that the actuary's estimate of the Fund's
deficit excludes $11 billion in expected capital accumulation through the end
of the current fiscal year (2013).
The $11 billion is expected from net
revenues out of loans originated since FY2010.
Losses on loans insured between Fiscal Years 2007 and 2009 continue to
place a significant strain on the Fund with $70 billion in FHA claims
attributable to loans insured in those years. The projected net cost of
those loans is more than $15 billion while the actuary found that the FHA's new
books of business are expected to be very beneficial, providing billions of
dollars in net revenues to offset losses on earlier books. Losses from
mortgages originated prior to 2009, HUD says, continue to impact FHA but do not
directly affect the adequacy of capital balances in the MMI Fund.
Three factors are driving the change
in FHA's position compared to last year:
The house-price appreciation
forecasts used for this actuarial review are significantly lower than those
used in last year's report because the actual turnaround in the housing market
occurred later than was projected last year. These house-price
appreciation estimates do not include improvements to home prices that occurred
since June and were depressed by a high level of refinance activity.
The continued decline in interest
rates, while good for the overall economy, costs the FHA revenue as its
borrowers pay off their mortgages to refinance into lower rates. This is clearly a positive but still impacts
the actuary's estimate of the value of the Fund. In addition, the actuary
predicts that borrowers with higher interest rates who are unable to refinance
will default at higher than normal rates, increasing losses from foreclosures
Based on recommendations made by the
Government Accountability Office (GAO), HUD's Inspector General and others, FHA
directed the actuary to employ a refined methodology this year to more
precisely predict the way losses from defaulted loans and reverse mortgages are
reflected in the economic value of the MMI Fund.
it is making a series of changes that, coupled with the expectation of $11
billion in additional business cited above, are intended to return FHA's capital reserves to a positive
position within the year and also reduce the likelihood that FHA would need to
exercise its authority to draw funds from the Treasury in September to cover
changes, FHA will:
Continue to sell expanded pools of
defaulted mortgages through its Distressed Asset Stabilization Program
(DASP). FHA announced it will sell at
least 10,000 distressed loans per quarter over the next year.
Target deeper levels of payment
relief for borrowers participating in its loss mitigation program. If more borrowers can retain their homes and
avoid foreclosure it will reduce associated losses to FHA.
Expand the use of short sales.
Continue to streamline policies to
increase efficiency and decrease losses associated with the sale of foreclose
Reverse a previous Administration's policy
of canceling FHA premiums after a certain period. While homeowners pay premiums for less than
ten years, FHA still covers losses over the entire life of the loan. Premiums on new loans will be paid over the
entire 30 year period.
FHA increase the annual insurance
premium paid by borrowers by 10 basis points or 0.1 percent and will strengthen
FHA's capital position without limiting access to credit for qualified
HUD Secretary Shaun Donovan said,
"FHA has weathered the storm of the recent economic and housing crisis by
taking the most aggressive and sweeping actions in its history to reform risk
management, credit policy, lender enforcement, and consumer protections. During this critical period in our nation's
economic history, FHA has provided access to homeownership for millions of
American families while helping bring the housing market back from the brink of
collapse to a point where the outlook is positive and recovery is underway."
FHA Acting Commissioner Carol
Galante added, "While the loans made during this Administration remain the
strongest in the agency's history, we take the findings of the independent
actuary very seriously. We will continue to take aggressive steps to
protect FHA's financial health while ensuring that FHA continues to perform its
historic role of providing access to homeownership for underserved communities
and supporting the housing market during tough economic times."