Despite having received a $1.7 billion infusion of capital from the U.S. Treasury on Sept. 30 – and despite having made considerable progress in making up for a budget shortfall in its mutual mortgage insurance fund (MMIF) during the past year by raising fees and tightening its lending standards – the Federal Housing Administration (FHA) is still facing a shortfall of about $1.3 billion, according to an actuarial report presented to Congress last week.
In addition, Carole Galante, commissioner for the FHA, told reporters during a press briefing last week that the agency is unlikely to raise the premiums it charges borrowers again this year because its rates are getting too expensive for the first-time and moderate-income home buyers it's designed to serve, Bloomberg News reports.
Still, according to the actuarial report prepared for the FHA by Integrated Financial Engineering Inc., the measures implemented by the FHA earlier this year to shore up its losses are helping to shrink the projected shortfall at a faster rate.
The FHA is required to keep enough capital in its reserves to cover losses on its $1.1 trillion portfolio of home loans for the full 30-year terms of those loans.
According to the U.S. Department of Housing and Urban Development (HUD), the MMIF has a current capital ratio of -0.11% – i.e., of the $1.1 trillion in loans the FHA must insure, its fund is currently short by a total of about $7.87 billion, in order to meet the required 2% capital reserve ratio. However, the fund is expected to return to the required 2% capital reserve ratio by 2015 – two years sooner than projections released in last year's actuarial report – due to the measures FHA recently put into place.
Meanwhile, FHA maintains more than $48 billion in liquid assets to pay expected claims.
‘What is clear from the independent actuarial report is that the aggressive steps we have taken have made FHA stronger and put it on a sustainable path to fulfill its dual mission of supporting access to homeownership for underserved and low-wealth borrowers as well as supporting and stabilizing the housing market,’ says Shaun Donovan, secretary of HUD, in a statement. ‘We look to the future and remain committed to continuing our progress to strengthen the MMI fund so that ladders of opportunity are available to all Americans for generations to come.’
‘As the value of the fund continues to improve, FHA will make every effort to maintain this positive momentum while simultaneously ensuring qualified borrowers in underserved markets can responsibly access mortgage credit,’ Galante says. ‘Throughout the economic crisis, FHA continued to fulfill its mission of stabilizing the housing market and providing responsible access to mortgage credit. The fact that the economy and the housing market are on the road to recovery is, in part, due to FHA's efforts.’
The actuarial report notes that recent changes in the FHA's credit and underwriting policies have helped improve its position compared to last year. These measures have reduced early payment delinquency rates to their lowest level in seven years. In addition, new loans are seeing vastly improved performance due to stricter lending standards.
What's more, enhanced loss mitigation policies have resulted in an 18% drop in serious delinquency rates and a 20% drop in foreclosures starts, the report finds.
In addition the FHA's real estate owned (REO) recovery rates rose 28% from last December.
Also helping to stem losses is the FHA's new streamlined short sale program, launched in July.
Still, a number of legislative changes are still needed in order to build on the FHA's momentum, the report states. These include the ability to seek indemnification from all classes of FHA-approved lenders; authority to terminate lender approval on a national, instead of regional, basis; revision of the compare ratio statute, to provide agility to FHA in lender monitoring; tools to enable FHA to more efficiently acquire the resources necessary to monitor its portfolio; and facilitating servicing by specialty servicers, which assists borrowers and ultimately reduces costs to the fund.
David H. Stevens, president and CEO of the Mortgage Bankers Association (MBA), says in a statement that the report, while recognizing FHA's current shortfall, ‘shows clear improvement over last year and is a sign that the MMIF is headed in the right direction and could soon be positive.’
‘The report indicates that the fund's improvement is attributable to a few important factors, most critically the continued focus to implement policy changes which have increased revenue and have led to improved loan performance, better risk management and better recovery rates,’ Stevens says. ‘These program improvements have increased the financial stability of the fund, even in the face of the weaker economic assumptions that the actuaries applied in this year's study.
‘FHA continues to play a critical role in the housing market, as the primary provider of credit for qualified first-time home buyers and those with little money for a down payment,’ Stevens adds. ‘Given the credit tightening occurring as a result of implementation of regulations such as the ability to repay/qualified mortgage (QM) rule, policymakers must continue to protect and improve the MMIF in order to ensure that FHA can serve its critical mission in the single-family market. MBA looks forward to working with all stakeholders to ensure FHA remains a key, positive component of the housing market.’
To download the full report, click here.