After fixing the problems with its reverse mortgage program, raising fees, tightening underwriting standards and improving loss mitigation policies, the Federal Housing Administration's (FHA) Mutual Mortgage Insurance (MMI) Fund is now on much better financial footing, the U.S. Department of Housing and Urban Development (HUD) says in its annual report to Congress.
HUD reports that, thanks to the aforementioned efforts, the fund gained nearly $6 billion in value over the last year and now stands at $4.8 billion.
Last fall, the FHA requested and was granted a $1.7 billion infusion of capital from the U.S. Treasury in order to shore up its reserves in light of major losses stemming from its reverse mortgage program, as well as from a record number of defaults. It was the first time in its 80-year history that the agency had requested a government bailout.
The problems with the reverse mortgage program as well as the high number of defaults, put considerable stress on the MMI fund, bringing its capital reserve ratio below the 2% threshold mandated under the Federal Credit Reform Act (FCRA). The problem was first identified in late 2012, when an independent actuarial report found that the fund was operating at a deficit of $16.3 billion.
Most of the losses in the reverse mortgage program, also known as the Home Equity Conversion Mortgage (HECM) program, occurred when millions of homeowners took out reverse mortgages, opted to take lump sum payments and then ran into financial problems.
Last year, following passage in the House and Senate, President Obama signed into law the Reverse Mortgage Stabilization Act, which gives HUD the power to make changes to the HECM program without congressional approval. The program has since been completely revamped – most notably, seniors are now limited on how much money they can take out at a time, once they are approved for reverse mortgage, which, in turn, helps limit the risk associated with the program.
As a result of these efforts, the fund took in about $21 billion in the past two years, the FHA says in its annual report this week.
Also helping to boost the fund's performance is the fact that delinquency rates for FHA-backed loans have dropped 14% during the past year – plus recovery rates improved by 16%, the FHA reports.
In the past two years, the FHA has seen a 30% drop in seriously delinquent rates; a 68% improvement in recovery rates; a 63% reduction in foreclosure starts; and an 85% drop in early payment defaults.
‘This year's report shows that the fundamentals of the fund are strong,’ says Julian Castro, secretary for HUD, in a statement. ‘Over the past five years, the FHA has taken a number of prudent actions to restore the fund's fiscal health. This is positive news for the economy and the millions of American families that count on the FHA.’
‘Improving the performance of the fund by $21 billion in two years is good news for the housing market,’ adds Biniam Gebre, acting commissioner for FHA. ‘FHA will continue to focus on meeting its mission of creating responsible access, investing in our economy and preserving pathways to the middle class. We remain dedicated to giving more hard-working, responsible families the chance to buy a home and not returning to the days of reckless lending that caused so much pain for middle-class families and the economy.’
As a result of the efforts, the MMI fund now has about $40 billion in available cash reserves, with about another $10 billion of additional economic value added each year.
The fund, however, remains below its congressionally mandated level – the news just means that the fund's performance is improving and that the FHA won't need another bailout in order to keep up its reserves.
‘This trend is good news for taxpayers and the program, as almost all of the vital metrics, including delinquencies, foreclosures and recoveries on property disposition, continue to improve,’ says David Stevens, president and CEO of the Mortgage Bankers Association, in a statement. ‘Maintaining this trend will require FHA to continue its ongoing work to improve transparency and certainty around its loan quality assessment methodology, as well as to re-examine mortgage insurance premiums, both the amount and the structure.’
As Stevens points out, ‘Premiums are currently at an all-time high, and FHA needs to find the right balance so it can meet its mission and further grow its reserves by increasing volumes without being adversely selected should only the highest risk borrowers be willing to pay the high premiums.’
The recent increase in mortgage insurance premiums is of paramount concern for the mortgage banking industry: Many industry experts have said that the high cost of mortgage insurance is keeping many first-time home buyers on the sidelines, and some say there is a direct correlation between the recent increase in rates and the drop-off in originations for FHA-backed loans.
‘Now that the MMI fund is on a path to recovery, the National Association of Realtors (NAR) urges FHA to lower its annual mortgage insurance premiums and eliminate the requirement that mortgage insurance be held for the life of the loan,’ says Chris Polychron, president of NAR, in a statement. ‘Achieving homeownership has become more difficult with current FHA mortgage insurance premiums.
‘NAR estimates that in 2013, nearly 400,000 creditworthy borrowers were priced out of the housing market because of high FHA insurance premiums,’ Polychron adds. ‘By lowering its fees, FHA could provide greater access to homeownership for historically underserved groups. To put it in perspective, over the past four years, the percent share of first-time buyers using FHA-backed loans shrank from 56 percent to 39 percent. A shift in policy would also increase the volume of borrowers acquiring FHA-backed loans and contribute to the solvency of the MMI fund.’
