The Federal Housing Administration
reported today that its capital reserve ratio will return to the 2% level mandated by Congress in 2015.
The FHA capital reserve account is a secondary cushion to absorb any unexpected claim expenses. Its financing account is the primary reserve, used to manage forecasted claim expenses on the amount of current insurance in force for the next 30 years. According to an actuarial review conducted by IHS Global Insight
, the ratio remains positive at 0.50%, down from 0.53% a year ago as the FHA has taken more market share.
According to the review, the capital reserve ratio will hit 1.99% at the end of 2014 and pass it the following year.
FHA's Growing Role
While the economic value of those loans has increased 28% from a year ago to $4.7 billion, the amount of insurance in force increased 36% to $931 billion, according to the review.
FHA Commissioner David Stevens said its role in the housing market is larger than expected but vital to the recovery.
"There is absolutely no question that FHA's role is larger than we expected it to be. We are in a most unique environment today. Without the FHA, the recovery would have clearly been delayed," Stevens said in a briefing to reporters Tuesday.
In 2010, the FHA insured $319 billion in single-family mortgages, second only to previous year. It funded 40% of purchase mortgages in 2010, including 60% of all loans for African-American and Latino homebuyers.
The dollar amount of capital resources reached its highest level ever in 2010 to $33.3 billion, up by $1.5 billion from a year ago, and insurance claims were 21% below the expected level in 2009.
For the review, Moody's Investors Service
forecasted future house prices, which Stevens called "considerably more pessimistic" but has a significant impact on the value of the fund.
Even in Moody's worst-case scenario, the amount of capital reserves will never reach below $9.9 billion. In 2009's review, the fund would fall negative if house prices were to drop to those depths.
But at houses prices' current baseline, the fund could improve to roughly $45 billion in capital reserves. If prices were to drop again, as both Fiserv's report and Standard & Poor's recent forecast expect, the reserve could drop back to the $25 billion range.
"This," Stevens said, "would delay the fund's recovery to 2%."
HECM's Drain on the Fund
The review broke down which segments of the FHA fund are contributing to the capital reserves. The capital reserve ratio for single-family loans was 0.42% and 3.17% for the newly introduced Home Equity Conversion Mortgage program, or reverse mortgages. Combined, the two portfolios held the 0.53% ratio reported in 2009.
In 2010, the capital reserve ratio improved for single-family mortgages to 0.59%, and the HECM reserve ratio "declined significantly" to a negative 0.98%, pulling the overall ratio to 0.50%, according to this latest review.
Stevens said the HECM program is relatively new, and the FHA has increased HECM premiums and introduced the HECM Saver option for 2011 in order to improve the capital reserve ratio for this individual segment.
In 2009, the FHA transferred $1.7 billion in capital resources from the single-family portfolio to the HECM one. Taking this transfer out, the single-family capital reserve ratio would have reached 0.79% in 2010, nearly 30 basis points above the 0.50% reported Tuesday.
"We've done considerable work on new policy guidelines, credit scores, downpayments, monitoring the lender performance, loan level reviews, servicer reviews, many actions taken with lenders not complying with the program, and new proposals to continue to keep up with the quality of the book," FHA Chief Risk Officer Bob Ryan said.
Loans insured before 2009 are responsible for 70% expected single-family loan losses at FHA, according to the review. Those mortgages insured between 2007 and 2008 have accounted for $9.7 billion in losses to the fund.
Both Stevens and Ryan pointed to the improved FICO
scores of incoming borrowers. In the 2009 review, 8.4% of all borrowers with FHA mortgages had credit scores below 600. That percentage fell to 1.3% in just one year.
The FHA expected 45.1% of borrowers to have credit scores above 680, but according to the 2010 review, 57.2% held scores that high.
Stricter measures have called into question the FHA's mission to fund mortgages to those who otherwise may be shut out of the market, but Stevens pointed out that the FHA is committed to providing "sustainable" homeownership that does not put taxpayers at further risk.
"Not everybody should have owned a home is one thing we learned in the last period," Stevens said.
Write to Jon Prior