The Federal Housing Administration's (FHA) Mutual Mortgage Insurance Fund has fallen from 3% last fall to 0.53% this year, below its congressionally mandated level of 2%, an actuarial review shows.
The review, part of the agency's annual report to Congress, was performed by Integrated Financial Engineering Inc., and its details were released Thursday, after a week delay. Department of Housing and Urban Development Secretary Shaun Donovan forewarned months ago that the report would reveal the FHA's capital-reserve ratio had dropped below 2% but has repeatedly denied that the agency will need a taxpayer bailout.
The FHA's capital-reserve ratio measures reserves held in excess of those needed to cover projected losses over the next 30 years. The 0.53% 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, the FHA holds $31 billion in its total reserves today, or more than 4.5% of total insurance-in-force, the agency says.
"We can cover all the loans in our portfolio and still have $6.4 billion left over," Donovan told reporters Thursday.
"There are real risks to the FHA, and we are aggressively addressing those real risks with real reforms," Commissioner David Stevens added. Stevens announced Thursday the appointment of the FHA's first chief risk officer, Robert Ryan. Ryan will oversee the coordination of the FHA's efforts to concentrate risk management in a single division devoted solely to managing and mitigating risk to the FHA's insurance fund.
Mortgage Bankers Association President and CEO John Courson called the announcement a "major wake-up call for FHA and the lending community, but no reason to panic."
"We are encouraged by the corrective actions FHA has already announced and has begun implementing – the elimination of seller-funded down payments and the recent program changes to help it better manage its risk – that should help FHA come out of the current housing crisis positioned to continue its mission promoting more affordable mortgage credit for borrowers," Courson said in a statement.
The agency is also looking to increase the net-worth requirements for FHA mortgagees and modify the mortgagee approval process.
In fiscal year (FY) 2009, the FHA guaranteed more than $360 billion in single-family mortgages, representing a 75% increase over FY 2008 activity. The report to Congress notes that the agency's FY 2005 – FY 2008 books of business have been "especially vulnerable to income and job loss, and are affected by significant home-price declines across the country.
The FY 2007 book was singled out and compared to the FHA's worst-ever books from the early 1980s. The FY 2009 book is showing favorable early-payment default rates in comparison to earlier books, and agency officials say average credit scores among new borrowers have risen.
John Clapp is the editor of Servicing Management magazine. He can be reached at email@example.com.