Former FHA Commissioner: Shortfall Pales in Comparison to the Economic Value it Provides
Here is the $64,000 question (or $1 trillion in FHA’s world) what happens after the fiscal year 2012 actuarial review is released to the public?
In reality, we may not know the true state of FHA's fiscal health for several more months.
For one, the federal budget process drives everything related to the fiscal health of FHA and not the results of the annual actuarial review although it is used to help make policy decisions, which are then incorporated into the annual budget process. As we learned today the FHA capital reserves continued its four-year decline but now what?
Since we are already in fiscal year 2013, what happened in fiscal year 2012 is vitally important information; however it is not necessarily the sole arbiter of what will happen to FHA in the present day especially given the loans are booked on a 30-year basis.
Later this month the Administration will publish its housing price and interest rate forecast which will be incorporated into the fiscal year 2014 budget process which is already in process. Those numbers will be plugged into the 2012 actuarial review results put together by FHA’s independent actuarial contractor. At that point, FHA’s claim rates and pre-payment speeds will be recalculated and perhaps lower the reported $13.5 billion shortfall.
Recall that in February 2012 FHA released the fiscal year 2013 proposed budget and also reported a $688 million capital reserves shortfall.* That amount was mitigated by several lender settlements.
Despite what FHA reported to Congress today (and then made public), it won’t be known until February 2013 when the Administration's proposed FY 2014 Budget is delivered to Congress if FHA will need to invoke its “permanent indefinite” budget authority to make up any shortfall.
The need for permanent indefinite authority is determined by the budget re-estimation process using the Administration's economic assumptions. Technically speaking, FHA has until the end of fiscal year 2013 (September 30, 2013) to book the re-estimate.
As noted, FHA will generate additional capital during fiscal year 2013 which will be added to the beginning balance of the capital reserve account. If that number is larger than the re-estimate, no permanent indefinite authority will be required.
Finally, the independent actuarial review process also requires that the MMI Fund be treated as if it were in run-off mode to see if cash inflows exceed its cash outlays. In reality though, the FHA is not in run-off mode and is endorsing loans every day. In fact they are on track to endorse more than 1.6 million loans in fiscal year 2013.
Recognizing FHA’s valuable contribution to the overall U.S. economy since its inception in 1935, in particular the last six years, should FHA need to invoke its budget authority sometime next year to stay afloat, it is my prediction that the amount will pale in comparison to the invaluable liquidity and tremendous economic value it has pumped into the U.S. economy in the middle of the worst housing crisis in our nation’s history.
* – Even though the fiscal year 2013 proposed federal budget was never approved by Congress, the applicable subsidy rates for all federal loan guarantee program (like FHA) still go into effect at the beginning of each fiscal year.