FHA stronger today than a year ago

November 29, 2010
| By Pete Daly |
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The Federal Housing Administration has announced that in the past 12 months, its capital reserve ratio held steady, claims on its Mutual Mortgage Insurance Fund declined significantly, and the economic value of FHA’s single-family insurance program grew by more than $1 billion, from $3.6 billion in 2009 to $4.7 billion in 2010.

The Mutual Mortgage Insurance Fund is FHA’s principal insurance account that includes all single-family and reverse mortgage activity.

Like its report to Congress last year, the accounting shows that FHA is sustaining significant losses from loans insured prior to 2009, and its capital reserve ratio remains below the congressionally mandated threshold of 2 percent of all insurance-in-force. However, 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 2 percent in 2014 and exceed the statutory requirement in 2015.

“It’s clear that FHA is in a stronger position today than we were just one year ago,” said FHA Commissioner David H. Stevens. “While we are not yet completely out of the woods, based on the evidence we’re seeing, FHA is weathering the economic storm while helping to create a firm foundation for our nation’s recovery.”

FHA’s capital reserve ratio measures reserves in excess of those needed to cover projected losses over the next 30 years. The independent actuarial reviews of the MMI Fund estimate FHA’s capital reserve ratio to be 0.50 percent of total insurance-in-force this year, falling fractionally from 0.53 percent in 2009. The difference is primarily attributed to the use of much more conservative assumptions regarding future house price growth than were used last year, which also resulted in an $8.5 billion decrease in economic value. However, that decrease was offset by a variety of factors, including an $8.7 billion increase in value due to better credit quality, loan performance and the premium increase implemented earlier this year.

Due in large part to the performance of recently originated loans, FHA’s total capital resources increased by $1.5 billion since last year to $33.3 billion and are at their highest level ever — $5.5 billion greater than predicted last year.

Even in the actuaries’ worst-case stress test scenario, FHA’s capital resources remain sufficient to cover projected claim losses, and FHA would not require a taxpayer subsidy, an improvement over last year’s assessment. It is due to new loans having higher credit quality than anticipated.

Loans insured before 2009 are responsible for 70 percent of the expected single-family loan losses. The now-prohibited seller-financed down payment assistance loans produced $6.6 billion in claims to date, and may ultimately cost FHA $13.6 billion.

According to the FHA, over the past year it served more than 1.75 million households by insuring $319 billion in single-family mortgages. This volume was second only to FY 2009.

FHA also enabled 882,000 families to become homeowners for the first time, representing one-third of all first-time buyers in the nation.

FHA helped more than 450,000 families avoid foreclosure through loss mitigation actions, and helped 556,000 families refinance their mortgage at lower interest rates, saving households an average of more than $140 per month. The agency also provided access to credit for almost 40 percent of purchase mortgages, including 60 percent of all African-American and Hispanic homebuyers.

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