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Pre-2010 Loans Leave FHA Capital Reserve Ratio Negative

Annual report issued to Congress

Nov. 16, 2012

By Mortgage Daily staff

The capital reserves for the Federal Housing Administration's mortgage insurance fund have turned negative, according to a report to lawmakers. Behind the deterioration were loans that were endorsed at least four years ago -- with seller-paid downpayment assistance loans continuing to dog the agency. While the deterioration wasn't unexpected, it does have FHA scrambling to avoid a government bailout.

FHA's capital reserve ratio has fallen to a negative 1.44 percent.

That works out to a negative economic value of $16.3 billion.

The findings were covered in the report, Annual Report to Congress Fiscal Year 2012 Financial Status FHA Mutual Mortgage Insurance Fund, issued Friday by the Department of Housing and Urban Development. It reflected findings from an independent actuarial study.

FHA continues to be impacted from losses on pre-2009 vintage originations.

"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 report said. "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."

Deterioration from a year ago was partly blamed on overly optimistic housing market predictions made in last year's report.

Another factor was low interest rate, which have led FHA borrowers to refinance into lower rate loans. In addition, the remaining high-rate borrowers who are unable to refinance are more likely to default.

A third factor in the year-over-year deterioration, according to HUD, was FHA's directing the actuary to begin utilizing a refined methodology to more accurately predict the way losses from defaulted loans and reverse mortgages are reflected in the economic value of the MMI fund.

In a statement from the Mortgage Bankers Association, the group's chairman, Debra W. Still, called the results "not wholly unexpected." She noted that last year's report gave a 50 percent likelihood of the fund going negative.

HUD said that the negative capital reserve does not mean that FHA doesn't have enough cash to pay its insurance claims. It also doesn't indicate that there is a current operating deficit or that FHA will immediately need to draw funds from the Treasury.

Despite the deficit, HUD says that the report doesn't directly affect the adequacy of capital balances in the MMI Fund.

"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," HUD said. "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."

In the announcement, HUD Secretary Shaun Donovan touted a number of steps taken by FHA as "the most aggressive and sweeping actions in its history." He also claims that FHA helped bring the U.S. housing market back from the "brink of collapse" to one that is experiencing an emerging recovery with a positive outlook.

The actuary reportedly found that the FHA's books of business since fiscal-year 2010 are expected to provide billions of dollars in net revenues to offset losses on earlier books. Acting Federal Housing Commissioner Carol Galante called FHA mortgages originated during the Obama administration "the strongest in the agency's history."

Even MBA's Still acknowledged that FHA "books from 2010 onward are performing well."

"The good news is that the steps that FHA has taken to better manage its risk in recent years have succeeded in vastly improving loan performance on more recent vintages," Still said. "The industry welcomed many of those changes and believes that policymakers can take further steps that would stabilize FHA single family programs, starting with a rigorous look at the data driving the actuarial results and an open, robust discussion over the future of the government's role in housing finance."

But Galante acknowledged that the actuarial findings are being taken "very seriously."

In addition to the $11 billion in capital expected to be accumulated during fiscal-year 2013, FHA hopes to avoid the need to request Treasury draws in September 2013 by selling at least 10,000 distressed loans each quarter through the Distressed Asset Stabilization Program. Other steps include revising its loss mitigation program to target deeper levels of payment relief for delinquent borrowers; expanding the use of short sales; and streamlining foreclosure policies.

FHA also plans to reverse a policy made prior to the Obama administration that cancels mortgage insurance premiums before the 10-year mark even though the loans have 30-year terms. Only new loans will be impacted.

In addition, FHA annual insurance premiums will be raised 10 basis points next year in a move that is expected to add $13 each month per average borrower without limiting access to credit for qualified borrowers.

"Today, FHA plays a critical role in the housing market, as the nearly sole provider of credit for qualified first-time home buyers who don’t have twenty percent to put down on a home," MBA's Still said. "These buyers are a necessary support for the housing market.

"While there is near-unanimous agreement that FHA's role in the single family housing market today is too large, we must remember that the housing market would be far worse off, today and in the future, without FHA."

read FHA's Annual Report to Congress

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