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FHA report to Congress

November 27th, 2011 10:49 AM by Lehel S.

Report to Congress
On Tuesday, November 15th, HUD released its Fiscal Year 2011 report to
Congress on the financial status of the Federal Housing Administration (FHA)’s
Mutual Mortgage Insurance (MMI) Fund. The findings of the annual
independent actuarial study indicate that, in the midst of continued weakness
and unevenness in the country’s housing market recoveries, the MMI Fund
capital ratio remains positive at 0.24 percent.  While still below the
Congressionally-mandated threshold of 2.0 percent capital, the independent
actuaries predict the Fund will return to that level more quickly than was
projected by last year’s review.
The economic value of new insurance endorsements in FY 2011 for the Fund
was nearly double that of FY 2010 endorsements, almost $11 billion. But the
new actuarial study also shows that FHA is expected to sustain significant
losses from loans insured prior to 2009. This has caused the capital reserve
ratio to decline to 0.24 percent of total insurance-in-force this year, reduced
from 0.50 percent in 2010. However, the report concludes that, barring a
further significant downturn in home prices, the MMI Fund will start to
rebuild capital in 2012 and return to a level of two percent by 2014 –
outpacing last year’s prediction.
A major contributing factor in that projection is the credit quality of FHA’s
books-of-business since the Obama Administration began in early 2009. And
it is continually improving.  This past year’s endorsements had the highest
credit quality ever recorded, as the average decision credit score across all
borrowers broke the 700 barrier for the first time. 
The MMI Fund’s capital reserve ratio measures reserves in excess of those
needed to cover projected losses over the next 30 years.  FHA’s total liquid
assets (cash plus investments) grew by $400 million since last year, to $33.7
billion.  That amount is $7.7 billion higher than was predicted last year by the
independent actuaries.  But at the same time, the economic net worth of the
Fund fell by $2.1 billion this year, from $4.7 billion to $2.6 billion, as FHA
continued to build loss reserves to prepare for greater claims in the coming
Losses on loans insured through the first quarter of fiscal year 2009 continue
to place a significant strain on the Fund and are expected to reach $26 billion
within a few more years.  Though they were prohibited in 2009, the ongoing
effect of so-called “seller-funded downpayment assistance loans” is still
HUD press
releasessignificant.  The net expected cost of those loans, as projected by the
independent actuaries, grew by $1.8 billion over the past year to $14.1 billion.
But the high-quality new business I mentioned will have a significant positive
impact on the MMI Fund.  The actuaries found that the FY2010 and FY2011
books are expected to be very profitable, providing significant net revenues
to offset losses on earlier books.
Also, under the base-case forecast used by the independent actuaries, the FY
2012 book will add an additional $9 billion in economic value to the Fund.  It’s
also important to note that the projections in the base-case forecast assume
no additional policy changes by FHA to future business.
The base-case scenario provided by Moody’s Analytics indicates price declines
in 2011 of 5.6% and predicts a small growth in prices in 2012 (1.3%), followed
by more steady growth in 2013. There is no current evidence for any
widespread, sustained home price declines in FY 2012, but should significant
declines happen to occur, it could create a situation in which the MMI Fund
would require support from Treasury.
However, FHA can implement policy changes, such as premium increases, to
provide additional support to the Fund.  We continue to keep our options on
the table.   As you know, in FY 2011 FHA introduced a new premium structure
that better aligns with current market conditions.  The structure set
underwriting minimums that combine credit score and down payment
requirements.  By doing so, we balanced risk management with broad access
to housing credit for borrowers who have historically met FHA credit quality
Fiscal Year 2011 Highlights
There were some very positive developments in FY 2011 regarding the overall
impact of FHA in the market.  This past year, FHA:
Insured its highest dollar volume ever, $236 billion - $218 billion in
single family mortgages and $18 billion in reverse mortgages (HECM).
Served more than 1.2 million households, bringing the active single
family portfolio to more than $1 trillion.
Insured 770,000 new purchase loans and more than 585,000 of them
were for families who became homeowners for the first time. This
represents 56 percent of all first-time buyers in the nation.
Provided refinancing for more than 440,000 homeowners who took
advantage of historically low interest rates to achieve average savings
of over $160 per month.
Passed the historic marker of having insured 40 million single-family
loans since its inception.
So FHA continues to play a critical role in the housing and mortgage markets
as it fulfills its mission to serve underserved communities and help facilitate
the recovery of the housing market by being a responsible countercyclical source of liquidity. 
FHA is on a path towards restoring the capital ratio but we remain cautious
and vigilant.  I want to emphasize again that the volatility of future housing
price forecasts remains the biggest risk to the MMI Fund as we take steps to
rebuild its capital reserves.  We will continue to monitor economic conditions
and may have to make course corrections as necessary to steer FHA toward a
more positive financial position. 
Thank you for your continued support of FHA and our mission.
HUD’s report to Congress on the Financial Status of the MMI Fund and FHA's
Fiscal Year 2011 Financial Status Briefing are available on HUD’s website,
Posted in:General
Posted by Lehel S. on November 27th, 2011 10:49 AM



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