As of the end of fiscal year 2019, the Federal Housing Administration’s (FHA) Mutual Mortgage Insurance Fund (MMIF) capital reserve ratio stood at 4.84%, which is more than double the mandated 2% minimum.
That’s the highest capital reserve ratio for the fund since fiscal year 2007, the FHA says in its annual report to Congress.
However, the FHA’s Home Equity Conversion Mortgage (HECM) portfolio, which has been hit hard with losses in recent years, continued to show a negative stand-alone capital ratio at -9.22%. Although that’s an improvement compared with fiscal year 2018, when it was -18.83%, it is – for now – reason enough for the FHA to keep premiums right where they are.
“The financial health of FHA’s single-family insurance fund is as sound as it has been in over a decade,” says Ben Carson, secretary of the U.S. Department of Housing and Urban Development (HUD), in a statement. “We have a strong economy with nearly full employment due to President Trump’s leadership, and this economic growth helps set the foundation for ongoing improvements in our FHA portfolio.”
FHA Commissioner Brian Montgomery attributed the health of the fund to “improvements we’ve begun to put in place in the last two years to stem the losses of the reverse mortgage portfolio, aided by favorable economic conditions.”
“Looking forward, we must focus on seeking the right balance between facilitating access to mortgage credit and managing risk,” Montgomery says. “Our mission is to make certain FHA remains a stable and reliable resource to provide housing finance support for first-time homebuyers and other underserved borrowers.”
As per the report, the FHA had insurance-in-force on single family mortgages valued at almost $1.3 trillion at the end of this fiscal year.
The performance of the agency’s forward book of business posted a stand-alone capital ratio of 5.44%. The MMI capital (formerly referred to as economic net worth) of the forward book of business also improved year-to-year by over 42%, with a value of more than $66.6 billion.
The HECM portfolio also showed an improvement in MMI capital, increasing $7.7 billion.
Despite the improvements in performance, HUD/FHA is not yet ready to start reducing premiums, which is akin to loosening credit for first-time home buyers.
“Although the results in this report are directionally positive, FHA must strengthen its portfolio if it is to capably fulfill a role as a countercyclical source of mortgage credit, particularly during periods of market distress, and ensure taxpayers are protected from unnecessary risks,” Carson says in the report. “In our Housing Finance Reform Plan released in September, we propose a number of solutions that would reduce risks to the MMI Fund, protect taxpayers from future bailouts and ensure the FHA maintains its focus on providing access to mortgage financing to low- and moderate-income families that cannot be fulfilled through traditional underwriting.
“Reforms should not and need not wait on legislation, and we are implementing the proposals for which HUD has authority in the absence of further Congressional action,” Carson adds.
In a statement, Robert Broeksmit, CMB, president and CEO of the Mortgage Bankers Association (MBA), says the fact that the MMIF is strengthening “is a clear sign that HUD is responsibly fulfilling its core mission of helping first-time homebuyers and other underserved borrowers attain affordable, sustainable credit without exposing taxpayers to unreasonable risk.”
“The fund’s capital ratio, which is now more than twice the statutory minimum, indicates that HUD’s policy changes over the last few years have had their intended effect of stabilizing the Fund and rebuilding reserves in order to prepare for any future downturns,” Broeksmit says. “We encourage HUD to closely monitor risks to the fund, including the layering of risks that could contribute to future defaults, as well as oft-cited challenges associated with the HECM program.”
The MBA further urges HUD “to continue to address ‘extreme risk layering’ … to protect the core of the program, while also exploring ways to ensure that premium levels for forward mortgages are not adversely impacted by the challenges in the HECM program. Together, these actions will allow HUD to set premiums that reflect the improved health of the Fund.”
Vince Malta, president of the National Association of Realtors (NAR), says he is “pleased to see the strength of the MMIF … as it continues to meet the needs of first-time homebuyers, minorities and those underserved by the current market.”
“However, the report also indicates current FHA buyers are paying premiums higher than necessary to cover taxpayer risks,” Malta adds in a statement. “As a result, NAR urges the FHA to consider reducing premiums and eliminating the life-of-loan policy, ensuring this critical market sector is not paying unnecessary fees to fund separate federal programs.
“Moving forward, we will work closely with the FHA to ensure the program facilitates access to mortgage credit while appropriately managing the risk to taxpayers,” Malta adds.