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Friday, November 16, 2012

2012 FHA Actuarial Review Press Release and Report

by Calculated Risk on 11/16/2012 12:22:00 PM

Note: Apparently the web release yesterday was accidental. Oops!


The U.S. Department of Housing and Urban Development (HUD) today released its annual report to Congress on the financial condition of the Federal Housing Administration (FHA) Mutual Mortgage Insurance (MMI) Fund. In reporting on findings of the independent actuarial study, HUD indicates that while FHA continues to be impacted by losses from mortgages originated prior to 2009, this report does not directly affect the adequacy of capital balances in the MMI Fund.

The independent study found that as the housing market continues to recover, the capital reserve ratio of the MMI Fund used to support FHA’s single family mortgage and reverse mortgage insurance programs fell below zero to -1.44 percent. This represents a negative economic value of $16.3 billion. This does not mean FHA has insufficient cash to pay insurance claims, a current operating deficit, or will need to immediately draw funds from the Treasury. The need to draw on Treasury funds is determined not by the economic assumptions of this actuarial review but those used in the President’s FY 2014 budget proposal to be released in February, with a final determination on a potential draw made in September. Also, the actuary’s estimate of the Fund’s economic value excludes $11 billion in expected capital accumulation through the end of FY 2013. Finally, HUD’s report includes additional actions designed to contribute billions of dollars in added value to the MMI Fund over the next several years.
Three factors are driving the change in FHA’s position compared to last year:

First, the house-price appreciation forecasts used for this actuarial review are significantly lower than those used in last year’s report, as the actual turnaround in the housing market occurred later than was projected last year. These house-price appreciation estimates do not include improvements to home prices that occurred since June and were depressed by a high level of refinance activity.

Second, the continued decline in interest rates, while good for the overall economy, costs the FHA revenue as its borrowers pay off their mortgages to refinance into lower rates. Again, this is clearly a positive, but it impacts the actuary’s estimate of the value of the Fund. In addition, the actuary predicts that borrowers with higher interest rates who are unable to refinance will default at higher than normal rates, increasing losses from foreclosures for FHA.

Third, based on recommendations made by the Government Accountability Office (GAO), HUD’s Inspector General and others, FHA directed the actuary to employ a refined methodology this year to more precisely predict the way losses from defaulted loans and reverse mortgages are reflected in the economic value of the MMI Fund.
On earlier loans and DAPs (DAPs were a hot topic on this blog from early 2005 until they were banned):
Losses on loans insured between Fiscal Years 2007 and 2009 continue to place a significant strain on the Fund with $70 billion in FHA claims attributable to loans insured in those years. Though they were prohibited in 2009, the ongoing effect of “seller-funded downpayment assistance loans” is still significant. The net expected cost of those loans, as projected by the independent actuaries, is more than $15 billion. By contrast, the actuary found that the FHA’s books of business since FY2010 are expected to be very beneficial, providing billions of dollars in net revenues to offset losses on earlier books.
The FHA had a very low market share in 2005 and 2006, but many of those insured loans were "seller-funded downpayment assistance loans" - and those loans performed horribly (as expected with no money down and buying at the peak).