by Calculated Risk on 11/12/2009 11:08:00 AM

From David Streitfeld at the NY Times: Housing Agency Says Cash Reserves Are Down Sharply

The Federal Housing Administration said Thursday morning that its cash reserves had dwindled significantly in the last year after a record drop in home prices.
...
The results of the F.H.A.’s annual audit showed the agency’s capital reserves to be 0.53 percent, far under the 2 percent minimum mandated by Congress. A year ago, the capital reserves were 3 percent.

From the FHA: Annual Actuarial Study Shows Capital Reserve Ratio Below Mandated Level; FHA Credit Policy Reforms Expected to Address Risk, Raise Reserve Levels

The independent study shows that FHA has sustained significant losses from loans made before 2009, and the capital reserve ratio has fallen below the congressionally mandated threshold, but concludes that under most economic scenarios considered FHA’s reserves would remain above zero.

FHA’s capital reserve ratio, which is determined through findings from the independent actuarial study, measures reserves held in excess of those needed to cover projected losses over the next 30 years. The review projects the capital reserve ratio to be 0.53 percent of total insurance in force this year, below the two-percent statutory threshold. This capital ratio fell from 3 percent in the fall of 2008, reflecting difficult conditions in the housing market. The 0.53 percent capital ratio (which represents the funds held in the Capital Reserve Account) is in addition to the auditor’s base case estimate of the 30-year reserves needed to pay for losses on existing loans (which are held in the Financing Account). Combining those two accounts, FHA holds $31 billion in its total reserves today, or more than 4.5 percent of total insurance-in-force.
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As part of its efforts to manage risk, FHA is modeling more extreme scenarios than those used by the actuary, including scenarios showing the reserves going below zero. FHA is committed not only to understanding its risks, but also to developing policy responses appropriate to addressing that risk.
emphasis added

More links:

Annual Report to Congress Regarding the Financial Status of the FHA Mutual Mortgage Insurance Fund

FHA Fiscal Year 2009 Actuarial Review Briefing