The U.S. Department of Housing and Urban Development (HUD) recently released its annual report to Congress on the financial condition of the Federal Housing Administration (FHA) Mutual Mortgage Insurance (MMI) Fund. In reporting on findings of the independent actuarial study, HUD indicates that while FHA continues to be impacted by losses from mortgages originated prior to 2009, this report does not directly affect the adequacy of capital balances in the MMI Fund.
The independent study found that as the housing market continues to recover, the capital reserve ratio of the MMI Fund used to support FHA’s single family mortgage and reverse mortgage insurance programs fell below zero to -1.44 percent. This represents a negative economic value of $16.3 billion. This does not mean FHA has insufficient cash to pay insurance claims, a current operating deficit, or will need to immediately draw funds from the Treasury. The need to draw on Treasury funds is determined not by the economic assumptions of this actuarial review but those used in the President’s FY 2014 budget proposal to be released in February, with a final determination on a potential draw made in September. Also, the actuary’s estimate of the Fund’s economic value excludes $11 billion in expected capital accumulation through the end of FY 2013. Finally, HUD’s report includes additional actions designed to contribute billions of dollars in added value to the MMI Fund over the next several years.
“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,” says HUD Secretary Shaun Donovan. “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.”
Three factors are driving the change in FHA’s position compared to last year:
• First, the house-price appreciation forecasts used for this actuarial review are significantly lower than those used in last year’s report, as 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.
• Second, 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. Again, this is clearly a positive, but it 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.
• Third, 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 is announcing a series of changes that are designed to build on previous steps that have improved the health of the Fund. Coupled with the actuary’s expectation of $11 billion in additional capital from new business in fiscal 2013, these changes 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, which all federal loan and loan guarantee programs have, to draw funds from the Treasury in September to cover estimated losses. To do this, FHA will:
• Continue to sell expanded pools of defaulted mortgages headed for foreclosure through the Distressed Asset Stabilization Program (DASP), offering investors and borrowers the opportunity to avoid costly foreclosures – and even giving homeowners an additional chance at staying in their homes – while reducing costs to the Fund. The FHA is committing to sell at least 10,000 distressed loans per quarter over the next year;
• Revise its loss mitigation program to target deeper levels of payment relief for struggling borrowers, allowing more families to retain their homes and avoid foreclosure, reducing associated losses to FHA;
• Expand the use of short-sales, which will provide opportunities for distressed borrowers who have been unable to get out from under hundreds of thousands of dollars of mortgage debt to move to a new job or start anew while improving recoveries for FHA. Foreclosures are expensive, for families and the Fund. By reducing the likelihood that a family will be foreclosed upon, we reduce costs for the Fund;
• Continue to streamline policies to increase efficiency and decrease losses associated with the sale of foreclosed properties;
• Reverse a policy made in a prior Administration to cancel required premium payments after a certain period that effectively meant that while FHA’s 100% insurance guarantee remained in effect for the 30-year life of a loan, borrowers were only required to pay premiums for less than ten years. FHA has been left without premiums to cover losses on loans held beyond the period for which it collects premiums. This change will apply to new loans.
• In 2013, enact an increase of 10 basis points or 0.1 percent to the annual insurance premium paid by borrowers on an FHA loan. This premium increase is expect to add $13 per month for the average borrower and will strengthen FHA’s capital position without limiting access to credit for qualified borrowers.
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. Though they were prohibited in 2009, the ongoing effect of “seller-funded downpayment assistance loans” is still significant. The net expected cost of those loans, as projected by the independent actuaries, is more than $15 billion. By contrast, the actuary found that the FHA’s books of business since FY2010 are expected to be very beneficial, providing billions of dollars in net revenues to offset losses on earlier books. Under the base-case projection of the independent actuary, FHA’s FY2013 book should add an additional $11 billion in economic value to the Fund.
Since taking office in 2009, the Obama Administration has instituted sweeping reforms to strengthen the MMI Fund. New policies have improved loan quality, strengthened lender enforcement, and improved premium revenues. This has been the most comprehensive update to FHA credit policies, risk management, lender monitoring, and consumer protections in its history, adding more than $20 billion in value to the Fund.
Over the past year, FHA has been:
• Critical to our Housing Recovery, insuring 1.2 million single-family mortgages with a principal balance of $213 billion. This was slightly less than activity in the prior Fiscal Year; purchase loan activity was down seven percent while refinance activity grew by seven percent;
• An Essential Source of Credit for First-Time Homebuyers. Endorsed approximately 734,000 purchase mortgages, with 78 percent to first-time homebuyers;
• Helping Families Refinance and Save. Facilitated over 451,000 refinance transactions, allowing homeowners to take advantage of low interest rates and saving them $220/mo. while reducing risk of the fund;
• Providing Stability to Seniors. Insured 54,000 reverse mortgage transactions for seniors seeking to age in place;
• Essential to minority homebuyers. FHA accounted for 50 percent of home purchase mortgages for African American borrowers and 49 percent for Hispanic/Latino borrowers.
For more information, visit www.hud.gov.