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FHA mutual mortgage insurance fund falls short by $1.3B

Big picture shows dramatic improvements

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[UPDATE 1: Capital ratio of 0.11 has been changed to -0.11 or (negative 0.11)]

The Department of Housing and Urban Development told Congress Friday that the Federal Housing Administration Mutual Mortgage Insurance Fund is still $1.3 billion in the hole even though it gained $15 billion over the past year.

The shortfall comes at a time when Congress is trying to carve back on the FHA's overall risk to taxpayers and when the agency is adjusting some of its loan limits to push more business to the private market.

HUD says the MMIF fund now has a current capital ratio of -0.11%, but is expected to return to the required 2% capital reserve ratio in 2015 – two years sooner than earlier projections. Right now, the FHA maintains more than $48 billion in liquid assets.

"What is clear from the independent actuarial report is that the aggressive steps we have taken have made FHA stronger and put it on a sustainable path to fulfill its dual mission of supporting access to homeownership for underserved and low-wealth borrowers as well as supporting and stabilizing the housing market," said HUD Secretary Shaun Donovan. 

"We look to the future and remain committed to continuing our progress to strengthen the MMI Fund so that ladders of opportunity are available to all Americans for generations to come."

HUD pointed to several positive developments — all of which were acknowledged in the Mortgage Bankers Association response.

Early payment defaults fell to their lowest level in seven years, FHA Commissioner Carol Galante pointed out. This suggests quality underwriting has created a more pristine book of business. The FHA also reported an 18% drop in serious delinquency rates and a 20% drop in foreclosure starts due to enhanced loss mitigation processes.

FHA REO recovery rates also rose 28% from last December.

"The report indicates that the fund’s improvement is attributable to a few important factors, most critically the continued focus to implement policy changes which have increased revenue and have led to improved loan performance, better risk management and better recovery rates," MBA CEO David Stevens said Friday.

"These program improvements have increased the financial stability of the fund, even in the face of the weaker economic assumptions that the actuaries applied in this year’s study."

The fund's shortfall is likely to attract Congressional attention, but lending associations focused on the year-over-year improvements.

Scott Olson, executive director of the Community Home Lenders Association, points to the quality of new FHA loans as an important development.

"In fact, the Community Home Lenders Association believes that FHA can best serve its mission of meeting consumer mortgage needs by lowering its annual premiums - while continuing its activities to maximize recoveries of distressed loans through loan modifications, short sales, and loan sales," Olson added.

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