It is the first time since 2008 that the Federal Housing Administration's (FHA) reserve ratio has exceeded the congressionally required 2.0% threshold.
The fund's improved performance is due mainly to efforts on the part of the FHA to reduce risk and improve loss mitigation. As a result of these efforts, serious delinquencies have declined 39% and recoveries have grown 28% since 2012.
The economic value of the fund gained $19 billion in fiscal year 2015, the FHA reports. The fund currently has a net value of nearly $24 billion.
In the past three fiscal years, the fund's value increased by $40 billion, the FHA reports. That marks ‘tremendous progress,’ FHA officials say, particularly because the fund had a negative value of $16.3 billion in 2012.
The improvement in the fund's value comes despite the fact that the FHA reduced its annual mortgage insurance premiums (MIP) by half a percent in January in order to entice more first-time home buyers back to the market. (That was after raising premiums starting in 2012 in order to improve performance.)
The reduction in January, in turn, led to a 42% increase in total volume, including a 27% hike in purchase-loan endorsements, the FHA says.
The reduction in premiums also allowed the FHA to expand access to credit by serving 75,000 new borrowers with credit scores of 680 or below.
‘FHA is on solid financial footing and positioned to continue playing its vital role in assisting future generations of homeowners,’ says Julian Castro, secretary for HUD, in a release. ‘We've taken a number of steps to strengthen the fund and increase credit access to responsible borrowers. Today's report demonstrates that we struck the right balance in responsibly growing the fund, reducing premiums and doing what FHA was born to do – allowing hardworking Americans to become homeowners and spurring growth in the housing market, as well as the broader economy.’
In fall 2013, the FHA requested and was granted a $1.7 billion infusion of capital from the U.S. Treasury (a.k.a., a ‘bailout’) in order to shore up its reserves in light of losses stemming from a high rate of default on FHA-backed loans, as well as major losses stemming from the FHA's reverse mortgage program. It was the first time in its 80-year history that the agency had requested a government bailout.
The problems with the reverse mortgage program and the high number of defaults put considerable stress on the MMI fund, bringing its capital reserve ratio below the 2% threshold mandated under the Federal Credit Reform Act. The problem was first identified in late 2012, when an independent actuarial report found that the fund was operating at a deficit of $16.3 billion.
Most of the losses were in the FHA's reverse mortgage program, also known as the Home Equity Conversion Mortgage (HECM) program. However, most of the problems with that program were fixed when the Reverse Mortgage Stabilization Act was signed into law in 2013. That law gives HUD the power to make changes to the HECM program without congressional approval. Since then, the HECM program has been completely revamped.
‘Improvements in the value of the MMI fund over the past few years are the result of a series of policy decisions designed to rebuild the fund and protect taxpayers and the role [the] FHA plays in the housing system, particularly for low- and moderate-income Americans and first-time home buyers,’ says David Stevens, president and CEO of the Mortgage Bankers Association (MBA), in a release. ‘[The] FHA and its leadership should be commended for protecting the program, as well as the American taxpayer.
‘One interesting thing to note is the overweight impact that the HECM program is having on the actuarial review,’ Stevens adds. ‘While only 10 percent of the overall portfolio, the HECM program has been responsible for a large part of the value swing in recent years, which is something that policymakers might want to be looking at. That, however, does not diminish what is really good news today – that the capital reserves are now forecast to exceed the two percent statutory minimum.’
Peter Bell, president of the National Reverse Mortgage Lenders Association, says the ‘positive actuarial report is great news for FHA and the HECM program because it shows that the MMI is in a position to protect itself, and taxpayers, from volatility in the marketplace.
‘The health of the MMI fund is bolstered by improvements in the HECM portfolio, attributable to changes in the actuarial forecasting of home values and interest rates and recent policies, such as changes to upfront MIP pricing and new rules requiring a financial assessment for all borrowers,’ Bell says. ‘NRMLA will continue our work with FHA to improve and grow the HECM program for more seniors who want to supplement their retirement funds with proceeds from a reverse mortgage.’
Meanwhile, HUD continues to look for new sources of revenue in order to shore up its reserves and improve its operations. During the MBA's annual Convention and Expo held in San Diego in October, Castro defended his department's request for an administrative fee that will be charged to lenders annually based on loan production.
The proposal – which is identical to one that was included in last year's federal budget request, but rejected by Congress – has raised strong objections from the MBA and the industry at large, mainly because HUD has not completely defined the fee structure or exactly how the funds will be used.
In March, Bill Cosgrove, chairman of the MBA, sent a letter to HUD saying that although the MBA ‘fully supports HUD's request for $174 million for FHA's administrative expenses,’ it has ‘serious concerns with the unprecedented step of funding FHA's administrative costs outside of the regular appropriation s process by seeking the funds through a fee on lenders.’
Castro, however, said the fee is necessary in order for HUD to upgrade its IT infrastructure, which has been outdated for many years.