The reaction to the release of an independent actuarial report that detailed the Federal Housing Administration's (FHA) Mutual Mortgage Insurance Fund (MMIF) falling below zero percent has been varied, with the Obama administration avoiding talk of a bailout while congressional and industry reaction ranged from undisguised I-told-you-so responses to a sense of cautious optimism.
The actuarial report's findings state that the MMIF's capital reserve ratio fell below zero to -1.44%, representing a negative economic value of $16.3 billion. Although the MMIF is congressionally mandated to maintain a 2% capital reserve ratio, there is no legal enforcement mechanism to require this ratio be maintained. Indeed, the MMIF registered a 0.24% level for fiscal year 2011, down from the 0.50% level of the preceding fiscal year.
Friday's actuarial report offers no opinion of whether the FHA would need to draw money from the U.S. Department of the Treasury in order to continue operating the MMIF. In a press conference held Friday afternoon, FHA Acting Commissioner Carol Galante told reporters, ‘It's literally impossible to say that we will or won't need a draw. We're doing all this to increase the likelihood that we will not.’ The Treasury Department did not issue a public statement on the matter.
To avoid a Treasury draw – and the accompanying perception of a bailout – the U.S. Department of Housing and Urban Development followed the report's release on Friday morning with an announcement of what it called ‘a series of changes’ designed to strengthen the fund. This includes raising the annual insurance premium on new FHA loans, an estimated addition of $13; continuing to sell expanded pools of defaulted mortgages headed for foreclosure through the Distressed Asset Stabilization Program; revising loss mitigation program to target deeper levels of payment relief for struggling borrowers; expanding the use of short sales; and continuing to ‘streamline policies to increase efficiency and decrease losses associated with the sale of foreclosed properties.’
‘While the loans made during this administration remain the strongest in the agency's history, we take the findings of the independent actuary very seriously,’ says Galante. ‘We will continue to take aggressive steps to protect FHA's financial health while ensuring that FHA continues to perform its historic role of providing access to homeownership for underserved communities and supporting the housing market during tough economic times.’
However, critics of the FHA have been unimpressed with the agency's response to the matter.
Edward Pinto, former executive vice president, chief credit officer and senior vice president of marketing and product management at Fannie Mae and a resident fellow at the American Enterprise Institute, a Washington, D.C.-based think tank, warns that the actuarial report should be seen as a harbinger of worse news to come.
‘This report should be cause for significant concern for Congress and taxpayers. As expected, the report shows that the FHA main single-family insurance program has a negative economic value of negative $13.5 billion,’ he says. ‘Even under generous accounting rules that no other financial entity gets to use, it is insolvent.’
Pinto adds that the FHA is intentionally trying to avoid the harsher aspects of its financial situation.
‘FHA chose to cherry pick a piece of 'good news' – the study projects that FHA will generate $11 billion in new economic value in fiscal year 2013 and seize on it as evidence the 2012 deficit will be largely wiped out and all will be fine,’ he continues. ‘This ignores the fact of the real negative $31 billion hole in 2012. No matter how bad things get today, FHA continually paints a rosy picture. The SEC would be all over a public company that played by FHA's rules.’
On Capitol Hill, there was bipartisan concern on the actuarial report. Sen. Tim Johnson, D-S.D., chairman of the Senate Banking Committee, told the Los Angeles Times that he was ‘deeply concerned’ by the report and would call HUD Secretary Shaun Donovan to testify before Congress on how to get the FHA back on ‘a fiscally sustainable path.’
‘The FHA plays a critical stabilizing role in the nation's housing market, and [HUD] and the administration need to do everything in their power to protect taxpayers and restore its capital reserve to the two percent level required by law,’ Johnson says.
Congressional Republicans were somewhat more critical in their analysis of the matter.
‘The recognition that FHA's economic value is now negative is a stark reminder that we have put off fundamental housing finance reform for too long,’ says Sen. Bob Corker, R-Tenn. ‘FHA has strayed a long way from its original mission, and it's time for us to return to fundamentals in housing, recognizing that having the federal government making loans to people who can't pay them back isn't good for homeowners, communities or the country.’
‘The FHA's report â�¦ is further proof that Congress needs to reform the government's role in the housing market,’ says Rep. Randy Neugebauer, R-Texas, and chairman of the House Oversight and Investigations Subcommittee. ‘FHA should be using more standardized accounting practices to more clearly assess the risks it takes on. Taxpayers simply can't afford any more taxpayer bailouts like we gave Fannie and Freddie.’
Also raising concern was the National Association of Federal Credit Unions (NAFCU).
‘While NAFCU strongly supports a healthy and active FHA, we are concerned that some of the actions announced to address the Fund's liabilities may be too harsh,’ says NAFCU President and CEO Fred R. Becker, in a letter to Donovan and Galante. ‘These actions, essentially, punish future borrowers for others' past mistakes. And, borrowers will likely see the FHA option as less attractive, which is clearly an unwanted result given that the FHA option is often the only option of many borrowers.’
However, there was a level of support for the FHA among several trade groups and nonprofits connected to the housing market.
‘While there is no doubt that the housing finance system needs to be reformed, the contributions that the FHA has made during this economic downturn underscore the need for a government backstop for both the primary and secondary mortgage markets,’ says Barry Rutenberg, chairman of the National Association of Home Builders. ‘In times of crisis, private financial institutions have fled the marketplace and consistently failed to step up to the plate. Without government support for home purchasing and refinancing, the nation's mortgage markets will grind to a halt, throwing the economy back into recession.’
‘It is â�¦ essential that FHA operate on a financially sound basis,’ says Mike Calhoun, president of the Center for Responsible Lending. ‘FHA has already instituted changes so that its current and more recent loans are projected to generate a profit. Those safeguards, along with the additional changes FHA announced today, should produce the additional revenue that will enable FHA to operate without a subsidy from taxpayers. Further restrictions, however, would undercut the ability of FHA to fulfill its mission.’
Julia Gordon, director of housing finance and policy at the Center for American Progress, says that the actuarial report should not be construed as evidence that the FHA's ‘basic business model is broken,’ adding that the FHA has a bright future.
‘The report predicts that in several years, the agency's fund will be back in the black and the agency will resume generating revenue as it has for so many years,’ says Gordon. ‘This turnaround will be a result of market stabilization, as well as better management, targeted policy changes and adjusted premiums.’
David H. Stevens, president and CEO of the Mortgage Bankers Association (MBA), served as FHA commissioner from 2009 to 2011, but chose not to make a public comment on the story. Instead, MBA Chairwoman Debra Still spoke for the trade group.
‘While everyone had hoped for a better report, the news that the fund has gone negative is not wholly unexpected, as last year's report predicted there was a 50 percent likelihood this would occur,’ says Still. ‘The characteristics and stresses on FHA's pre-2010 books of business continue to be the source of losses, while books from 2010 onward are performing well.
‘The good news is that the steps that FHA has taken to better manage its risk in recent years have succeeded in vastly improving loan performance on more recent vintages,’ Still adds. ‘The industry welcomed many of those changes and believes that policymakers can take further steps that would stabilize FHA single family programs, starting with a rigorous look at the data driving the actuarial results and an open, robust discussion over the future of the government's role in housing finance.’