FHA’s Year-End Report Shows Cash Reserves Remain Below Legal Limit

The ""Federal Housing Administration"":http://www.fha.gov (FHA) says it has sustained significant losses from home loans insured prior to 2009 and as a result, its capital reserve ratio remains below the threshold mandated by law.

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FHA released its ""annual report to Congress"":http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2010/HUDNo.10-252/report_to_congress.pdf on Monday for fiscal year 2010, which for the agency ended in September. The numbers show that the federal mortgage insurer has $4.7 billion in cash reserves, which represents 0.5 percent of all outstanding single-family mortgages insured by FHA.

By law, FHA is required to keep the capital reserve ratio at a minimum of 2 percent of all the mortgages it insures.

Since last year, FHA has increased its capital reserves, but because the agency's market share has continued to grow, the ratio held relatively steady. FHA ended fiscal year 2009 with $3.6 billion in its cash reserve bucket, which at that time equated to 0.53 percent of total insurance-in-force â€" the lowest level for the reserve fund in the agency's 75-year history. By comparison, in 2008, FHA's capital cushion ratio was 3 percent.

""The report concludes that under conservative assumptions of future growth of home prices, and without any new policy actions, FHA's capital ratio is expected to approach two percent in 2014 and exceed the statutory requirement in 2015,"" according to a ""statement from FHA"":http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2010/HUDNo.10-252.

Despite the agency's cash shortfall, FHA Commissioner David Stevens says the federal mortgage insurer will not need a taxpayer subsidy, and he stressed that even in a worst-case scenario, FHA has sufficient funds to cover projected claim losses.

FHA's capital reserve fund â€" the one that's been below the legal limit for two years â€" holds excess cash brought in by the federal mortgage insurer beyond what it needs to cover projected losses for the next 30 years. But due in large part to the performance of recently originated loans,

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FHA's total capital resources to cover losses increased by $1.5 billion since last year, to $33.3 billion, and are at their highest level ever â€" $5.5 billion greater than predicted last year.

""It's clear that FHA is in a stronger position today than we were just one year ago,"" Stevens said. ""While we are not yet completely out of the woods…FHA is weathering the economic storm.""

Loans insured before 2009 are responsible for 70 percent of the expected single-family mortgage losses, according to FHA. Though they are now prohibited, so-called ""seller-financed down payment assistance loans"" from the pre-2009 period have produced $6.6 billion in claims to-date and may ultimately cost FHA $13.6 billion.

Conversely, loans insured since 2009 earned FHA's insurance fund $4.8 billion and are estimated to generate $28.3 billion in economic value by 2016. Expected economic value of FY 2010 and FY 2011 loans alone are estimated to reach $11 billion, according to the agency's report.

Insurance claim expenses this year were 21 percent lower than predicted in the agency's previous annual report. FHA says improved loan quality and stricter oversight of lenders mean its future books-of-business are expected to generate significant amounts of net capital that will help pay losses on earlier books and rebuild the capital position of the agency's insurance fund.

Since July 2009, FHA has implemented sweeping reforms to its credit policies, risk management, lender enforcement, and consumer protections.

The agency hired its first chief risk officer, increased enforcement of its lenders, changed the approval process making lenders liable for oversight of their mortgage brokers, and strengthened FHA's lender approval requirements. The agency eliminated approval for loan correspondents and increased net worth requirements for lenders.

FHA also introduced a new premium structure for borrower that officials say is more in line with private mortgage insurers' pricing, and is estimated to provide approximately $300 million per month of additional capital to the agency.

The mortgage insurer also changed its credit score and down payment requirements to ensure that it is backing borrowers who have historically performed well. Specifically, a minimum down payment of 10 percent is now required of borrowers with credit scores below 580 and applicants with credit scores below 500 are no longer eligible for FHA insurance.