FHA Shortfall Belies Significant Progress

After asking for taxpayer assistance forrnthe first time in its 79 year history last September, a new actuarial reportrnsays the Federal Housing Administration (FHA) may again need to return to thernwell.  FHA said today that an independentrnaudit has found it could still face a significant shortfall in its Mutual MortgagernInsurance (MMI) Fund.</p

Resultsrnof the audit, set to be presented to Congress today, calculated the fundsrnsolvency under a range of economic assumptions. rnFHA is mandated by Congress to maintain a ratio of 2 percent of capitalrnagainst loans it guarantees and FHA has failed to meet that capital level forrnthree consecutive years. The report shows that the Fund hasrngained $15 billion dollars in value over the last year and now stands atrnnegative $1.3 billion.  The current capital ratio is negative 0.11rnpercent.  The actuary anticipates that the Fund will return to thernrequired two percent capital reserve ratio in 2015, two years sooner than wasrnprojected by last year’s audit. Meanwhile, FHA maintains over $48 billion inrnliquid assets to pay expected claims.</p

In its countercyclical role, FHArnradically increased its share of the mortgage market as private mortgagernfinancing disappeared in 2007.  As therneconomy continued to deteriorate loans it guaranteed between 2005 and 2009 hadrna high rate of defaults and foreclosures, eroding the fund below the 2 percentrnmargin.  Despite a range of actions takenrnto reduce risk and shore up the MMI, FHA had to draw $1.7 billion against itsrnborrowing authority from the Treasury Department this past September.    </p

Tightened leading standards have cutrndelinquencies and increased fees have increased income.  These changes along with improving homernprices have begun to rebuild the fund.  Arnnew shortfall is at this point is not inevitable and FHA Commissioner CarolrnGalante refused to comment on whether FHA would request another Treasuryrndraw.  Such a need would normally be indicatedrnin the Obama Administration’s next budget proposal due out in February and arnfinal decision about the draw made at the end of the 2014 Fiscal Year.</p

The independent actuarial report identified several factors as driversrnfor the improvement in FHA’s position compared to last year, including: </p<ul class="unIndentedList"<liEarly Payment Defaults are at theirrnlowest levels in seven years which shows that changes in credit andrnunderwriting policy have improved the performance of the newest books ofrnbusiness.</li</ul<ul class="unIndentedList"<liAn 18 percent drop in seriousrndelinquency rates and a 20 percent drop in foreclosures starts are a result ofrnenhanced loss mitigations policies. </li</ul<ul class="unIndentedList"<liFHA REO recovery rates up 28 percentrnfrom last December, and this figure does not account for the future impact ofrnFHA's new streamlined short sale program which was launched in July. </li</ul

Galanternsaid, “As the value of the Fund continues to improve, FHA will make everyrneffort to maintain this positive momentum while simultaneously ensuringrnqualified borrowers in underserved markets can responsibly access mortgagerncredit. Throughout the economic crisis, FHA continued to fulfill its mission ofrnstabilizing the housing market and providing responsible access to mortgagerncredit. The fact that economy and the housing market are on the road tornrecovery is in part due to FHA’s efforts.”</p

ShaunrnDonovan, Secretary of Housing and Urban Development, parent agency of FHA said,rn”What is clear from the independent actuarial report is that the aggressivernsteps we have taken have made FHA stronger and put it on a sustainable path tornfulfill its dual mission of supporting access to homeownership for underservedrnand low-wealth borrowers as well as supporting and stabilizing the housingrnmarket.  We look to the future and remainrncommitted to continuing our progress to strengthen the MMI Fund so that laddersrnof opportunity are available to all Americans for generations to come.”</p

David H. Stevens, President and CEO of thernMortgage Bankers Association (MBA), commented on FHA’s announcement. “Today’srnreport, while recognizing FHA’s current shortfall, shows clear improvement overrnlast year and is a sign that the MMI Fund is headed in the right direction andrncould soon be positive.   </p

“The report indicates that the fund’s improvementrnis attributable to a few important factors, most critically the continued focusrnto implement policy changes which have increased revenue and have led tornimproved loan performance, better risk management and better recovery rates.rn These program improvements have increased the financial stability of thernfund, even in the face of the weaker economic assumptions that the actuariesrnapplied in this year’s study.   </p

Scott Olson, Executive Director ofrnthe Community Home Lenders Association (CHLA), released the following statement:   </p

“It is important to keep inrnmind that the quality of new FHA loans is very strong.  In fact, thernCommunity Home Lenders Association believes that FHA can best serve its missionrnof meeting consumer mortgage needs by lowering its annual premiums – whilerncontinuing its activities to maximize recoveries of distressed loans throughrnloan modifications, short sales, and loan sales.”

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