FHA Reserves Drop below Mandated Levels; Need for Treasury Draw Uncertain

By: Jann Swanson •

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 for FHA.
  • 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.

HUD said 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 estimated losses. 

Under the 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 properties.
  • 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 borrowers.

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."