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Mixed Outlook for FHA

HUD issues annual report to Congress

Nov. 15, 2011

By staff

A government report issued to Congress projects that the Federal Housing Administration's insurance fund will return to the required capital level within three years. But another report from a public policy research group predicts that an FHA bailout of as much as $100 billion will be required unless there is a rapid U.S. economic recovery. The government's report forecasts that outstanding FHA loans will increase by more than half over the next seven years.

The Department of Housing and Urban Development Tuesday announced that the capital ratio for FHA's Mutual Mortgage Insurance Fund is still positive this year at 0.24 percent -- though it fell from 0.50 percent in 2010. HUD reported the capital ratio in its annual report to Congress, which was based on an independent actuarial study.

The ratio measures reserves in excess of what is needed to cover projected losses over the next 30 years.

In addition, given improved risk controls and higher mortgage insurance premiums implemented 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."

If U.S. housing markets see no further downturns, then the fund, which was established in 1934, will return to a 2 percent capital ratio by 2014.

"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," Acting FHA Commissioner Carol Galante said in the announcement.

But Joseph Gyourko -- who is Martin Bucksbaum Professor of Real Estate, Finance, and Business & Public Policy at the Wharton School, University of Pennsylvania -- has a more grim assessment.

Gyourko wrote that FHA deep trouble.

"Unless the
economy makes a swift recovery, my research shows that FHA will need a massive taxpayer bailout -- between $50 and $100 billion," according to Gyourko's report, which was published by the American Enterprise Institute for Public Policy Research. "If the economy turns down for any reason, even more funds would be needed."

FHA oversees an insurance portfolio that exceeds $1.3 trillion, the report to Congress said. Out of that, MMI fund programs account for around $1.078 trillion. By 2018, the total MMI fund programs are projected to reach $1.662 trillion.

Over the past three years, dedicated MMI loss reserves have grown by nearly $20 billion despite $37 billion in insurance claims. But the report acknowledged a backlog has developed on delinquent loans that have not yet had claims because of "robo-signing" at mortgage servicers, and related claims "claims could come in very large numbers this next fiscal year and, as a
result, capital resources decline significantly over the FY2012-2013 biennium as loss reserves are expended."

HUD reported that the economic net worth of the MMI fund fell from $4.7 billion to $2.6 billion this year. Hurting the fund were $1.8 billion in costs from seller-funded downpayment assistance loans originated prior to the prohibition of such programs in 2009. So far, DPA loans, as they were known, were responsible for $14.1 billion of the $26 billion in projected losses for loans originated through the first-quarter 2009.

The report indicated that 1,197,821 single-family FHA loans were endorsed for $217.8 billion during fiscal 2011, falling from 1,667,609 loans for $297.6 billion the prior year. The record since the turn of the century was set in 2009, when 1,831,999 mortgages were endorsed for $330.5 billion.

In addition, 73,098 home-equity conversion mortgages were endorsed for $18.792 billion in 2011, down 7 percent from fiscal-year 2010.

HUD projects that total FHA endorsements including HECMs will fall to $171.9 billion in fiscal 2012, bottom out at $159.0 billion in 2013 and grow to $238.3 billion by 2015.

On purchase-money loans, FHA's market share has grown from 4.5 percent in 2006 to 29.7 percent in 2010.

"The new findings of the independent actuaries are cause for caution, as they suggest that stress on outstanding books-of-business has increased over the past year," the report to Congress concluded. "Yet their reports also confirm that the steps HUD has taken since the start of this Administration have been both necessary and prudent."

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