FHA ISSUES ANNUAL
FINANCIAL STATUS REPORT TO CONGRESS
December 19, 2011
The Department of Housing and Urban
Development (HUD) released its annual report to Congress on the
financial status of the Federal Housing Administration (FHA) Mutual
Mortgage Insurance (MMI) Fund. This insurance Fund is the backbone of
the FHA single-family and reverse mortgage programs. In reporting on
findings of the annual independent actuarial study, HUD indicates that,
in the midst of continued weakness in housing markets across the county,
the MMI Fund capital ratio remains positive this year at 0.24 percent.
With new risk controls and premiums put in place by the Obama
Administration, the independent actuaries predict the Fund will return
to the Congressionally-mandated threshold of two percent capital more
quickly than was projected by last year’s review. The economic value of
new insurance endorsements in FY 2011 for the Fund was nearly double
that of FY 2010 endorsements, being close to $11 billion.
As was the case last year, the new actuarial study shows that FHA is
expected to sustain significant losses from loans insured prior to 2009,
and thus its capital reserve remains below the congressionally mandated
threshold of two percent of total insurance-in-force. However, the
actuaries’ report concludes that, barring a further significant downturn
in home prices, the MMI Fund will start to rebuild capital in 2012, and
return to a level of two percent by 2014 – outpacing last year’s
prediction. The actions taken by this Administration have put FHA into a
position where the actuaries expect rapid growth in capital once the
housing market begins a broad-based recovery.
“In the midst of a tough housing market the FHA MMI Fund continues to be
actuarially sound,” said Acting FHA Commissioner Carol Galante. “Because
of the Obama Administration’s strategy to protect the FHA Fund –
tightening of risk controls, increased premiums to stabilize near-term
finances, and expanded loss mitigation assistance to avoid unnecessary
claims – this past year’s endorsements had the highest credit quality
ever recorded, and will yield historically high levels of net receipts
in the years ahead.”
FHA’s capital reserve ratio measures reserves in excess of those needed
to cover projected losses over the next 30 years. The independent
actuarial reviews of the MMI Fund estimate FHA’s capital reserve ratio
to be 0.24 percent of total insurance-in-force this year, falling from
0.50 percent in 2010. FHA’s total liquid assets (cash plus investments)
grew by $800 million since last year, to $33.7 billion. That amount is
$1.9 billion higher than at the end of FY 2009, and is also $7.7 billion
higher than was predicted last year by the independent actuaries. At the
same time, the economic net worth of the Fund fell by $2.1 billion this
year, from $4.7 billion to $2.6 billion, as FHA continued to build loss
reserves to prepare for greater claims in the coming years.
Losses on loans insured through the first quarter of fiscal year 2009
continue to place a significant strain on the Fund and are expected to
reach $26 billion within a few more years. Though they were prohibited
in 2009, the ongoing effect of so-called “seller-funded downpayment
assistance loans” is still significant. The net expected cost of those
loans, as projected by the independent actuaries, grew by $1.8 billion
over the past year to $14.1 billion. Conversely, the actuaries found
that the FY2010 and FY2011 books are expected to be very profitable,
providing significant net revenues to offset losses on earlier books.
Loans insured to-date under the Obama Administration are providing $18
billion in economic value for the MMI Fund. Under the base-case forecast
used by the independent actuaries, the FY 2012 book will add an
additional $9 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 helped to protect
future loan performance. This has been the most comprehensive update to
FHA credit policies, risk management, lender monitoring, and consumer
protections in its history. To emphasize this new commitment to risk
management, HUD hired the first-ever FHA Chief Risk Officer and
established a permanent Risk Office to expand FHA’s capacity to assess
financial and operational risk, perform more sophisticated data
analysis, and respond to market developments. HUD also increased
enforcement of FHA lenders, eliminated approval for loan correspondents,
and increased net worth requirements for lenders wanting to underwrite
FHA loans. Additionally, HUD introduced a new premium structure that
better aligns with current market conditions, and it set underwriting
minimums that combine credit score and down payment requirements to
balance risk management with broad access to housing credit for
borrowers who have historically met FHA credit quality standards.
Specifically, a minimum down payment of 10 percent is now required of
borrowers with credit scores below 580 and applicants with credit scores
below 500 are no longer eligible for FHA insurance.
Over this past year, FHA:
more than 1.2 million households and insured $218 billion in
single-family mortgages, bringing the active single family portfolio to
more than $1 trillion.
Enabled more than 585,000
families to become homeowners for the first time. This represents 56
percent of all first-time buyers in the nation.
Helped more than 362,000 families
avoid foreclosure through loss mitigation actions.
Helped 440,000 families to
refinance their mortgage at lower interest rates, saving households an
average of more than $160 per month.
Provided access to credit for
close to 40 percent of all homebuyers needing mortgages, including 60
percent of all African-American and Hispanic homebuyers.
Reduced mortgage payments for
142,000 distressed homeowners through loan modifications. While standard
modifications reduced typical payment burdens by 11 percent ($85), FHA
HAMP actions reduced average mortgage costs by 24 percent ($218).