Lending

FHA reaches capital mandate and here's what's next

Industry, legislators weigh in on FHA’s performance and future

crystal ball

The Federal Housing Administration surprised some observers Monday when it announced that its Mutual Mortgage Insurance Fund grew significantly in fiscal 2015, reaching its Congressionally mandated threshold of 2% well ahead of the FHA’s own projections.

The FHA’s fiscal year 2014 actuarial report projected that the MMI Fund would reach the Congressional mandated 2% level during fiscal 2016, but the FHA said Monday that its latest independent actuarial analysis shows the MMI Fund’s capital ratio stands at 2.07%, well above the 2014 level of 0.41%.

A deeper look at the FHA’s data shows that the increase was not entirely driven by the significant increase in loan volume during fiscal 2015, due largely to a 50 basis point cut in annual mortgage insurance premium prices announced in January by the Obama Administration.

According to analysis from Compass Point Research and Trading, the FHA’s mortgage interest rate reduction actually had “little impact” on the capital ratio.

The Compass Point report, authored by Isaac Boltansky and Amy DeBone, noted that much of the increase was driven by the FHA’s Home Equity Conversion Mortgage program.

Without the HECM program, the MMI Fund would sit at 1.65%, below the 2% threshold set by Congress.

“In fact, the FY15 economic net worth projections for forward mortgages of $17 billion increased only marginally from the $16.2 billion estimate released last year,” Boltansky and DeBone write. “The HECM economic net worth of $6.8 billion, on the other hand, far exceeded the previous estimate of negative $1.1 billion which drove the overall MMIF capital ratio crossing the 2.0% threshold this year.”

The significance of the HECM portion of the capital reserve ration was also noted by former FHA Commissioner Carol Galante, who said Monday that the positive results of the FHA actuarial report show how volatile the HECM program can be relative to the single-family program.

In a blog posted Monday on HousingWire, Galante wrote:

Every year since 2010, the HECM portfolio has alternated in large swings between negative and positive economic values.

Each year, even though this portfolio is only a small fraction (.1 trillion) of the overall 1.1 trillion dollar portfolio, it impacts the overall capital ratio, which is the measure most relied upon to assess the FHA. 

This year, a large gain pulls the overall ratio above 2%. And while policy changes to the HECM program in recent years indicate that it should continue on a positive path, it remains volatile.

For reasons that have never been clear to me, the decision to combine these two portfolios into one capital reserve ratio was made prior to 2008, and in order to provide more transparency into the overall FHA performance, that decision should be reversed.

The HECM program may be volatile, but one organization said Monday that it’s going to continue working to improve the HECM program.

“The positive FY2015 Actuarial Report is great news for FHA and the HECM program because it shows that the MMI is in a position to protect itself, and taxpayers, from volatility in the marketplace,” Peter Bell, the president of the National Reverse Mortgage Lenders Association, said.

“The health of the MMI fund is bolstered by improvements in the HECM portfolio attributable to changes in the actuarial forecasting of home values and interest rates, and recent policies such as changes to upfront MIP pricing and new rules requiring a financial assessment for all borrowers,” Bell continued. “NMRLA will continue our work with FHA to improve and grow the HECM program for more seniors who want to supplement their retirement funds with proceeds from a reverse mortgage.”

The inclusion and impact of the HECM program in the FHA’s total capital reserve ratio was specifically noted by House Financial Services Committee Chairman Jeb Hensarling, R-Texas, who said in a statement that the achievement of the 2% threshold is hardly a cause for celebration.

“After breaking the law for seven years, it’s good to see that the FHA is finally in compliance but it’s sad that merely following the law is what passes for ‘victory’ in the Obama administration,” Hensarling said.

“This is no time for hollow victory laps from administration officials,” Hensarling continued.

“Hardworking taxpayers remain exposed to more than $1 trillion in FHA insured mortgage credit risk, and the FHA capital reserve remains woefully insufficient,” Hensarling said. “In fact, were it not for the FHA’s volatile reverse mortgage program, the FHA single-family loan portfolio would still be below the legally required 2% threshold. Instead of complementing a robust private mortgage market, the FHA continues to crowd out private lenders. That’s no way to create the sustainable housing finance system that Americans deserve.”

Lindsey Johnson, the president and executive director of U.S. Mortgage Insurers, also suggested that Monday’s report was a reason for caution not elation.

“We welcome the progress made, but caution against a false sense of security from today’s report,” Johnson said.

“It is a reminder of continued taxpayer exposure to more than $1 trillion in FHA insured mortgage credit risk,” Johnson continued. “The MI industry and FHA should serve as complementary ways to promote sustainable homeownership. But to do that, FHA still needs to become more financially resilient in line with the rest of the financial system, and remain focused on its core mission of serving underserved communities.”

In the Compass Point report, Boltansky and DeBone write that the FHA’s current capital level is somewhat tenuous, citing the FHA’s own actuary, which projected a 20% chance that the capital ratio could dip below 2% in fiscal 2016.

Boltansky and DeBone write that the day’s positive headlines will most likely engender some pushes to further reduce the FHA’s annual premiums.

“Given the actuarial volatility of the HECM, and the outsized impact of the program on the MMIF’s capital ratio this year, our sense is that the case for lowering mortgage insurance premiums is not as strong as headlines would suggest,” the Compass Point analysts noted.

“While we expect both consumer and industry groups to push aggressively for another round of forward mortgage premium cuts as a result of the MMIF crossing 2.0%, our sense is that the policy case for another reduction is weakened by the fact that crossing the 2.0% threshold was due to the reverse mortgage portfolio’s valuation which is ten times more sensitive to economic forecasts than the forward portfolio,” the analysts continued.

In fact, the Community Home Lenders Association did just that on Monday, reiterating a call it made recently for the FHA to cut its premiums back to pre-crisis levels.

“The Community Home Lenders Association commends FHA for its strong financial results – and renews its call made last month for a further premium cut now that the FHA Fund exceeds its 2% Net Worth target,” CHLA Executive Director Scott Olson said in a statement.

Despite that push from the CHLA, Boltansky and DeBone write that they place the likelihood of a further cut in 2016 at fairly low.

“We continue to believe, however, that the FHA is unlikely to materially alter its current pricing structure in the near-term as it appears content with its current market share, commentary in the report suggests that the current structure is appropriately pricing risk, there is a belief that clarifying lender liabilities could have a greater impact on credit availability, and the political dynamics of the issue remain complicated,” Boltansky and DeBone write.

“We are maintaining our 20% odds of an additional FHA premium cut in 2016 and remain committed to our view that if a cut is coming it will likely focus on up-front premiums which has less of an impact on borrowers than an annual premium reduction,” they conclude.

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