FHA’s Capital Ratio Returns to Statutorily Required Level
Earlier today, HUD released its 2015 Annual Report to Congress on the Financial Status of the Federal Housing Administration’s (FHA) Mutual Mortgage Insurance Fund (MMIF). The report finds that the MMIF, which funds FHA’s single-family and reverse mortgage programs, has a capital ratio of 2.07 percent, slightly above the statutory minimum ratio of 2 percent. This is the first time the MMIF has met its minimum capital ratio since 2009.
According to the report, the MMIF began fiscal year (FY) 2015 with a net value of $24 billion, an increase of nearly $19 billion over the beginning of FY 2014. In FYs 2012 and 2013, due to losses caused by the financial crisis, the MMIF ran a negative balance. In September 2013, HUD was forced to request funding from the U.S. Treasury Department to keep it actuarilly solvent. In FY 2014, the MMIF returned to a positive balance, but its capital ratio was at only .41 percent.
It is important to note that, even when it had to request funds from the Treasury, the MMIF was not actually in debt. Rather, it did not have enough value to meet more stringent congressionally mandated standards. Federal law requires FHA to have enough reserves to cover 100 percent of its anticipated losses over the next 30 years. Consequently, when the report says that the MMIF has an economic value of $19 billion, it is referring to the amount of money the report projects would be remaining in the fund if FHA was forced to pay off all of its projected losses in the next 30 years. When HUD was forced request $1.7 billion from Treasury in 2013, to restore its economic balance, the MMIF actually held over $30 billion in reserves.
HUD says a number of recent FHA policies helped restore MMIF’s value, including establishing a minimum down payment of ten percent for borrowers with credit scores below 580, higher minimum net worth standards for participating lenders, new loss mitigation protocols, and procedures for selling delinquent loans to investors to reduce FHA’s losses.
The report also credits HUD’s decision in January to lower the annual mortgage insurance premium for new FHA loans by 50 basis points with helping to grow the MMIF while also allowing it to better assist underserved borrowers. The premium reduction contributed a 42 percent increase in FHA loan volume, the report finds, including a 27 percent increase in purchase loans. The reduction also allowed FHA to insure loans for 75,000 borrowers in FY 2015 with credit scores below 680.
FHA also released a comprehensive summary of the report’s findings.