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FHA’s Mutual Mortgage Insurance Fund Capital Ratio Soars Past Required 2 Percent Level

money-fiveThe Federal Housing Administration (FHA)’s Mutual Mortgage Insurance (MMI) Fund gained $19 billion in economic value during Fiscal Year 2015, pushing its capital ratio past the 2 percent threshold required by Congress, according to HUD’s annual report to Congress released Monday morning.

The independent actuarial analysis found the MMI’s capital ratio to be at 2.07 percent, attributing the soaring economic value of the portfolio during FY 2015 to strong actions taken to reduce risk, cutting losses, and improving recoveries.

“FHA is on solid financial footing and positioned to continue playing its vital role in assisting future generations of homeowners,” HUD Secretary Julián Castro said.  “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.”

FY2015 marked the third consecutive year of economic growth for the FHA’s MMI fund. The growth of the fund allows FHFA to expand credit access to qualified borrowers; the annual report noted a significant increase in loan volume during FY 2015 which FHA largely attributed to a reduction of 50 basis points to mortgage insurance premiums (MIPs) in January 2015.

The Collingwood Group Vice Chairman and housing policy expert Brian Montgomery, former FHA Commissioner and assistant HUD secretary, said the sudden increase in the value of the MMI fund is due primarily to a spike in the value of FHA's reverse mortgage (HECM, or home equity lines of credit) portfolio from FY2014 to FY2015.

“The details are always in the numbers, and if you look at the numbers, the reverse mortgage economic value has been pretty volatile for the last several years. In fact, last year it was minus $1.2 billion,” Montgomery said. "This year, it actually swung dramatically the other way to a positive $6.8 billion. That, quite frankly, is really the reason the capital ratio went above 2 percent, because of the much higher swing in the value of the HECM portfolio. If you look at just the forward mortgages, it’s still below 2 percent—about 1.63 percent—but the HECMs from 2009 are counted together with those forward mortgages and that’s what put it over the 2 percent mark.”

Major findings of the report released Monday include:

  • The MMI Fund capital ratio skyrocketed up to 2.07 percent during FY 2015, higher than Congress’s requirement of 2 percent and up from a paltry 0.41 percent during FY 2014.
  • Total loan volume soared by 42 percent fueled by the FHA’s reduction of MIPs in January by 50 basis points, which allowed FHA to offer credit to 75,000 new borrowers with credit scores of 680 or lower. Purchase loan endorsements increased by 27 percent during FY 2015.
  • The MMI Fund’s economic value more than quadrupled during FY2015, from $5 billion up to $24 billion—the largest one-year increase since FY 2012. At that time, the fund had a value of negative $16.3 billion, but has grown by $41 billion since then.
  • FHA’s efforts to reduce risk and improve loss mitigation have resulted in a decline of 39 percent in serious delinquencies and an increase of 28 percent in recoveries.

Tom Woods, chairman of the National Association of Home Builders (NAHB) and a home builder from Blue Springs, Missouri, said the increase in the MMI Fund's capital ratio should eventually lead to more home buying opportunities.

“Today’s FHA report is very positive,” Woods said. "The FHA Mutual Mortgage Fund posted an improvement of $19 billion over the past year and its capital-reserve ratio increased to 2.07 percent, just above the Congressionally mandated level of 2 percent. This upward trend is another indicator that the housing recovery continues to move forward and that FHA’s financial picture continues to brighten. This report should provide momentum for the agency to take additional steps to expand credit opportunities for first-time home buyers and young families seeking to enter the housing market.”

While HUD and the FHA highly touted the progress made in a public appearance by Castro and the FHA's Principal Deputy Assistant Secretary Ed Golding at New York University's School of Business, some organizations received the news with caution.

“We welcome the progress made, but caution against a false sense of security from today’s report.  It is a reminder of continued taxpayer exposure to more than $1 trillion in FHA insured mortgage credit risk,” US Mortgage Insurers President and Executive Director Lindsey Johnson said. “The MI industry and FHA should serve as complementary ways to promote sustainable homeownership.  But to do that, FHA still needs to become more financially resilient in line with the rest of the financial system, and remain focused on its core mission of serving underserved communities.”

House Financial Services Committee Chairman Jeb Hensarling (R-Texas), who has previously grilled Castro in Committee hearings about the FHA's MMI Fund's capital ratio being below 2 percent, downplayed the fund's rise above 2 percent in a statement on Monday.

“After breaking the law for seven years, it’s good to see that the FHA is finally in compliance but it’s sad that merely following the law is what passes for ‘victory’ in the Obama administration,” Hensarling said. “This is no time for hollow victory laps from administration officials. Hardworking taxpayers remain exposed to more than $1 trillion in FHA insured mortgage credit risk, and the FHA capital reserve remains woefully insufficient. In fact, were it not for the FHA’s volatile reverse mortgage program, the FHA single-family loan portfolio would still be below the legally required 2 percent threshold. Instead of complementing a robust private mortgage market, the FHA continues to crowd out private lenders. That’s no way to create the sustainable housing finance system that Americans deserve.”

Click here to see HUD’s complete report to Congress.

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.
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