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FHA Earns Passing Grade

Capital reserve ratio exceeds 2%

Nov. 16, 2015

By Mortgage Daily staff

For the first time in years, the Federal Housing Administration's Mutual Mortgage Insurance Fund has met congressionally mandated capital requirements.

Three years ago, the economic value of capital reserves at the MMI Fund was a negative $16.3 billion -- putting the capital reserve ratio at 1.44 percent.

That left the government-owned mortgage insurer with a capital reserve ratio that was far short of the minimum two percent ratio mandated by Congress.

On Monday, the Department of Housing and Urban Development reported in its annual report to Congress that the MMI Fund's capital reserve ratio has reached 2.07 percent.

It's the first time since 2008 that the ratio has exceeded the congressionally required 2 percent threshold.

The economic value of the MMI Fund has reached nearly $24 billion for fiscal-year 2015, up $19 billion from fiscal-year 2014.

"This is the third consecutive year of economic growth for the MMI Fund, allowing FHA to expand credit access to qualified borrowers even as the broader housing market continues to recover," HUD said. "FHA's annual report also notes a significant increase in loan volume during FY 2015, due largely to a reduction in annual mortgage insurance premium prices announced in January."

HUD noted that the reduction in M.I. premiums lifted total volume 42 percent. Purchase financing endorsements were up 27 percent.

In addition, the cut in premiums reportedly enabled an additional 75,000 new borrowers with credit scores of 680 or less to gain access to home financing.

"Improvements in the value of the MMI fund over the past few years are the result of a series of policy decisions designed to rebuild the fund and protect taxpayers and the role FHA plays in the housing system, particularly for low and moderate income Americans and first-time homebuyers," Mortgage Bankers Association President and Chief Executive Officer David H. Stevens commented in a written statement. "FHA and its leadership should be commended for protecting the program, as well as the American taxpayer."

Stevens -- who served as Federal Housing Commissioner in the Obama administration -- noted, however, that home-equity conversion mortgages are having a disproportionate impact on capital reserves. He explained that while only 10 percent of the overall FHA book of business consists of HECMs, reverse mortgages have been responsible for a large part of the value swing in recent years. He said policymakers might want to examine this disparity more closely.

Less optimistic about the improved financial condition were private mortgage insurers who compete with FHA.

"We welcome the progress made, but caution against a false sense of security from today's report," U.S. Mortgage Insurers President and Executive Director Lindsey Johnson said in a written statement. "It is a reminder of continued taxpayer exposure to more than $1 trillion in FHA insured mortgage credit risk. The M.I. industry and FHA should serve as complementary ways to promote sustainable homeownership. But to do that, FHA still needs to become more financially resilient in line with the rest of the financial system, and remain focused on its core mission of serving underserved communities."

Lindsey highlighted the disparity between his group's members, which have been subjected to increased capital requirements as a result of the Federal Housing Finance Agency's updated private mortgage insurance eligibility requirements, while FHA has not seen any increase in its own capital requirements.

"Accordingly, USMI is calling for reforms to the FHA capital standard," the statement said. "USMI encourages policymakers to increase the fund's minimum capital ratio to reduce the chances of a taxpayer bailout in future market downturns, and to stress test those levels to ensure the fund's financial position is more consistent with the risks assumed."

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