Delinquency Watch at FHA: There's Not Much Left in FHA's Mutual Mortgage Insurance Fund to Cushion against Future Claims
England, Robert Stowe, Mortgage Banking
The Federal Housing Administration (FHA), after coming to the rescue of a busted housing mortgage market with very-low-down-payment mortgages, now finds itself on thin ice with excess capital reserves near the vanishing point. Rising delinquencies in single-family mortgages are depleting the reserves for FHA's Mutual Mortgage Insurance (MMI) Fund. Some now fear that continued high delinquencies could deplete not just the $2.6 billion excess capital reserves but also all $33.6 billion in available capital resources. Should that ever happen, it could require a taxpayer bailout for the first time in the agency's 78-year history. * Last November, the Department of Housing and Urban Development (HUD) reported that the much-watched capital reserve ratio for FHA's Mutual Mortgage Insurance Fund fell to a tiny 0.24 percent--far below the 2 percent buffer Congress mandates. * It marked the third year the ratio has been below 2 percent, and the latest number is half again the level of the prior year of 2010, when the capital reserve ratio was calculated to be o.5o percent. * The capital ratio sank below 2 percent in 2009 to 0.53 from 3 percent in 2008. In 2007, it was a relatively robust 6.3 percent. * In spite of the vanishing capital reserves, HUD has continued to be upbeat about the long-term outlook for the MMI Fund, based on projections for gains from new business over the next eight years. The projections were made in the annual independent actuarial review conducted by Integrated Financial Engineering Inc. (IFE Group), Rockville, Maryland, and based on economic scenarios provided by Moody's Analytics, West Chester, Pennsylvania.
The actuarial review also found that FHA is on a path to restoring its excess capital fund to the minimum 2 percent by 2014, according to Raphael Bostic, assistant secretary for policy development and research at the HUD.
"The [actuarial] report demonstrates the long-term strength of the fund, while not shying away from the challenges it faces in the near term due to the ongoing stresses in the housing market," he says.
Acting FHA Commissioner Carol Galante announced on Feb. 27 that FHA would increase its annual mortgage insurance (MI) premium by 0.10 percent for loans of less than $625,5000 and 0.35 percent for loans greater than that amount. Upfront premiums were also increased by 0.75 percent.
Congress authorized the higher annual premiums last year. FHA increased the upfront premium under statutory authority that gives it the option to change the upfront premium without congressional approval.
The premium increases appear to indicate that both Congress and the FHA are worried about the MMI Fund's financial health and want to shore things up sooner rather than later.
Under last year's actuarial review by IFE Group--which does not include the new increases in premiums--the MMI Fund was expected by 2014 to regain its 2 percent excess capital level under the baseline scenario of a continued recovery and no second recession.
There were also other more pessimistic scenarios in the review. Under one alternative scenario, the United States experiences a second mild recession scenario. In this case, the capital reserve ratio would reach 2 percent in 2016. Under a deeper second recession, the 2 percent goal would be reached in 2017; and under a protracted slump, the goal would be reached in 2018.
No doubt part of the reason for premium hikes comes from the fact that last year's projections, which were completed in July 2011 but not released until November, assumed that house prices would rise 1.2 percent in 2012 after a 5.6 percent decline in 2011. So far this year, however, house prices have continued to decline.
Not surprisingly, there are skeptics about the official positive outlook or the MMI Fund. Chief among them is Joseph Gyourko, professor of real estate, finance and business and public policy at the Wharton School of the University of Pennsylvania, Philadelphia. …