FHA Shortfall Belies Significant Progress


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.

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
  • 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.

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.”

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.”

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