FHA Reserves Drop below Mandated Levels; Need for Treasury Draw Uncertain

by devteam November 17th, 2012 | Share

The U.S. Department of Housing andrnUrban Development (HUD) said today that the capital reserve ratio of the FederalrnHousing Administration’s (FHA) Mutual Mortgage Insurance (MMI) Fund fell to arnnegative balance in FY2012.  The Fund,rnwhich is Congressionally mandated to maintain a capital reserve ratio of 2rnpercent is now at -1.44 percent, representing a negative value of $16.3rnbillion.  The news came with the releasernof HUD’s annual report to Congress on the financial condition of the FHA MMIrnFund which contains an independent actuarial study of the fund.  </p

The actuary’s findings do not meanrnthat FHA has insufficient cash to pay insurance claims, a current operatingrndeficit, or will need to immediately draw funds from the Treasury.  Any Treasury draw would be determined, not byrnthe economic assumptions of the actuarial review but by those used in thernPresident’s FY2014 budget proposal due in February.  A final determination on a draw will not bernmade until next September, and HUD said that the actuary’s estimate of the Fund’srndeficit excludes $11 billion in expected capital accumulation through the endrnof the current fiscal year (2013).</p

The $11 billion is expected from netrnrevenues out of loans originated since FY2010. rnLosses on loans insured between Fiscal Years 2007 and 2009 continue tornplace a significant strain on the Fund with $70 billion in FHA claimsrnattributable to loans insured in those years.  The projected net cost ofrnthose loans is more than $15 billion while the actuary found that the FHA’s newrnbooks of business are expected to be very beneficial, providing billions ofrndollars in net revenues to offset losses on earlier books.  Losses fromrnmortgages originated prior to 2009, HUD says, continue to impact FHA but do notrndirectly affect the adequacy of capital balances in the MMI Fund. </p

Three factors are driving the changernin FHA’s position compared to last year:  </p<ul class="unIndentedList"<liThe house-price appreciationrnforecasts used for this actuarial review are significantly lower than thosernused in last year's report because the actual turnaround in the housing marketrnoccurred later than was projected last year. These house-pricernappreciation estimates do not include improvements to home prices that occurredrnsince June and were depressed by a high level of refinance activity.</li<liThe continued decline in interestrnrates, while good for the overall economy, costs the FHA revenue as itsrnborrowers pay off their mortgages to refinance into lower rates. This is clearly a positive but still impactsrnthe actuary's estimate of the value of the Fund. In addition, the actuaryrnpredicts that borrowers with higher interest rates who are unable to refinancernwill default at higher than normal rates, increasing losses from foreclosuresrnfor FHA.</li<liBased on recommendations made by thernGovernment Accountability Office (GAO), HUD's Inspector General and others, FHArndirected the actuary to employ a refined methodology this year to morernprecisely predict the way losses from defaulted loans and reverse mortgages arernreflected in the economic value of the MMI Fund.</li</ul

HUD saidrnit is making a series of changes that, coupled with the expectation of $11rnbillion in additional business cited above, are intended to return FHA’s capital reserves to a positivernposition within the year and also reduce the likelihood that FHA would need tornexercise its authority to draw funds from the Treasury in September to coverrnestimated losses.  </p

Under thernchanges, FHA will:</p<ul class="unIndentedList"<liContinue to sell expanded pools ofrndefaulted mortgages through its Distressed Asset Stabilization Programrn(DASP). FHA announced it will sell atrnleast 10,000 distressed loans per quarter over the next year. </li<liTarget deeper levels of paymentrnrelief for borrowers participating in its loss mitigation program. If more borrowers can retain their homes andrnavoid foreclosure it will reduce associated losses to FHA.</li<liExpand the use of short sales.</li<liContinue to streamline policies tornincrease efficiency and decrease losses associated with the sale of foreclosernproperties.</li<liReverse a previous Administration's policyrnof canceling FHA premiums after a certain period. While homeowners pay premiums for less thanrnten years, FHA still covers losses over the entire life of the loan. Premiums on new loans will be paid over thernentire 30 year period.</li<liFHA increase the annual insurancernpremium paid by borrowers by 10 basis points or 0.1 percent and will strengthenrnFHA's capital position without limiting access to credit for qualifiedrnborrowers.</li</ul

HUD Secretary Shaun Donovan said,rn”FHA has weathered the storm of the recent economic and housing crisis byrntaking the most aggressive and sweeping actions in its history to reform riskrnmanagement, credit policy, lender enforcement, and consumer protections.  During this critical period in our nation’srneconomic history, FHA has provided access to homeownership for millions ofrnAmerican families while helping bring the housing market back from the brink ofrncollapse to a point where the outlook is positive and recovery is underway.”</p

 FHA Acting Commissioner CarolrnGalante added, “While the loans made during this Administration remain thernstrongest in the agency’s history, we take the findings of the independentrnactuary very seriously.  We will continue to take aggressive steps tornprotect FHA’s financial health while ensuring that FHA continues to perform itsrnhistoric role of providing access to homeownership for underserved communitiesrnand supporting the housing market during tough economic times.”

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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