After asking for taxpayer assistance for the first time in its 79 year history last September, a new actuarial report says the Federal Housing Administration (FHA) may again need to return to the well. FHA said today that an independent audit has found it could still face a significant shortfall in its Mutual Mortgage Insurance (MMI) Fund.
Results of the audit, set to be presented to Congress today, calculated the funds solvency under a range of economic assumptions. FHA is mandated by Congress to maintain a ratio of 2 percent of capital against loans it guarantees and FHA has failed to meet that capital level for three consecutive years. The report shows that the Fund has gained $15 billion dollars in value over the last year and now stands at negative $1.3 billion. The current capital ratio is negative 0.11 percent. The actuary anticipates that the Fund will return to the required two percent capital reserve ratio in 2015, two years sooner than was projected by last year's audit. Meanwhile, FHA maintains over $48 billion in liquid assets to pay expected claims.
In its countercyclical role, FHA radically increased its share of the mortgage market as private mortgage financing disappeared in 2007. As the economy continued to deteriorate loans it guaranteed between 2005 and 2009 had a high rate of defaults and foreclosures, eroding the fund below the 2 percent margin. Despite a range of actions taken to reduce risk and shore up the MMI, FHA had to draw $1.7 billion against its borrowing authority from the Treasury Department this past September.
Tightened leading standards have cut delinquencies and increased fees have increased income. These changes along with improving home prices have begun to rebuild the fund. A new shortfall is at this point is not inevitable and FHA Commissioner Carol Galante refused to comment on whether FHA would request another Treasury draw. Such a need would normally be indicated in the Obama Administration's next budget proposal due out in February and a final decision about the draw made at the end of the 2014 Fiscal Year.
The independent actuarial report identified several factors as drivers for the improvement in FHA's position compared to last year, including:
- Early Payment Defaults are at their lowest levels in seven years which shows that changes in credit and underwriting policy have improved the performance of the newest books of business.
- An 18 percent drop in serious delinquency rates and a 20 percent drop in foreclosures starts are a result of enhanced loss mitigations policies.
- FHA REO recovery rates up 28 percent from last December, and this figure does not account for the future impact of FHA's new streamlined short sale program which was launched in July.
Galante said, "As the value of the Fund continues to improve, FHA will make every effort to maintain this positive momentum while simultaneously ensuring qualified borrowers in underserved markets can responsibly access mortgage credit. Throughout the economic crisis, FHA continued to fulfill its mission of stabilizing the housing market and providing responsible access to mortgage credit. The fact that economy and the housing market are on the road to recovery is in part due to FHA's efforts."
Shaun Donovan, Secretary of Housing and Urban Development, parent agency of FHA said, "What is clear from the independent actuarial report is that the aggressive steps we have taken have made FHA stronger and put it on a sustainable path to fulfill its dual mission of supporting access to homeownership for underserved and low-wealth borrowers as well as supporting and stabilizing the housing market. We look to the future and remain committed to continuing our progress to strengthen the MMI Fund so that ladders of opportunity are available to all Americans for generations to come."
David H. Stevens, President and CEO of the Mortgage Bankers Association (MBA), commented on FHA's announcement. "Today's report, while recognizing FHA's current shortfall, shows clear improvement over last year and is a sign that the MMI Fund is headed in the right direction and could soon be positive.
"The report indicates that the fund's improvement is attributable to a few important factors, most critically the continued focus to implement policy changes which have increased revenue and have led to improved loan performance, better risk management and better recovery rates. These program improvements have increased the financial stability of the fund, even in the face of the weaker economic assumptions that the actuaries applied in this year's study.
Scott Olson, Executive Director of the Community Home Lenders Association (CHLA), released the following statement:
"It is important to keep in mind that the quality of new FHA loans is very strong. In fact, the Community Home Lenders Association believes that FHA can best serve its mission of meeting consumer mortgage needs by lowering its annual premiums - while continuing its activities to maximize recoveries of distressed loans through loan modifications, short sales, and loan sales."