FHA's Reserve Ratio Dives to 0.53% after 'Significant' Loss
[Update 1 includes details on the HECM study and FHA's capital resources.] Due to "significant losses" on mortgages closed before this year, the Federal Housing Administration's (FHA) capital reserve ratio plummeted below the congressionally mandated 2% threshold, according to an actuarial study of FHA's fiscal strength. Under "most" economic conditions modeled in the actuarial study, the capital reserve ratio would remain above zero, FHA said. The capital reserve ratio, which measures the reserves held in excess of what is needed to cover projected default-related losses over the next 30 years, now stands at 0.53% of total insurance-in-force as of September, compared with 3% in fall of 2008. These funds, held in the FHA's Capital Reserve Account, are in excess of the funds held in the Financing Account to cover the "base case " projection of capital needed to cover default-related losses on existing loans over the next 30 years. Combined, these accounts hold $31bn -- more than 4.5% of FHA's total insurance-in-force. The decline this year in the capital reserve ratio is partially due to the need to reserve more funds for anticipated claim costs on the current portfolio -- essentially accounting for more funds in the Financing Account and less in the Capital Reserve Account, according to a report to Congress by US Department of Housing and Urban Development (HUD) secretary Shaun Donovan. FHA's capital resources grew from $27.2bn at the start of the fiscal year to $30.7bn at the end of the year. HUD attributed the growth to premium revenues collected on new insurance in fiscal year 2009 -- a record year of new insurance commitments. But despite the growth in capital resources, FHA's recent books-of-business continue to experience elevated levels of stress due to house price declines, income loss and climbing unemployment, according to HUD's report. For example, the '08 year of single-family insurance -- representing 15.7% of total insurance -- saw a 12.13% seriously delinquent rate as of the latest actuarial study. But the '07 year of insurance -- representing only 5.7% of total insurance -- saw an 18.53% serious delinquency rate. The '09 year of insurance performed relatively well as of the most recent data, experiencing only 1.6% serious delinquencies although the loans insured in fiscal year 2009 account for more than 31% of all loans insured by FHA. FHA insures approved lenders against default-related losses on qualifying mortgages. As HousingWire previously reported in the May 2009 magazine issue, the volume of mortgages the FHA insures swelled in recent years. FHA made significant changes to its underwriting criteria, increased oversight of FHA lenders and put an end to the controversial seller-funded downpayment assistance program. As a result of efforts to reduce risk, the quality of new loans insured by FHA improved on several metrics including average borrower FICO score, which is up to 693 compared with 633 two years ago, FHA said in a statement Thursday. “There are real risks to the FHA and we are aggressively addressing those real risks with real reforms,” said FHA commissioner David Stevens. “FHA will not tolerate fraudulent or predatory lending practices and we have enforced tighter standards and taken action against lenders who violate FHA origination and underwriting requirements, starting with the suspension of Taylor, Bean and Whitaker and most recently, actions against Lend America. The FHA has also implemented several reforms to strengthen its credit policies, which will ultimately help shore up the reserves and reduce risk.” The findings come as part of FHA's annual actuarial study and reflect FHA's status at the end of its fiscal year 2009, which concluded in September. The study was scheduled for public release last week but delayed over FHA's concerns regarding the accuracy of the actuary's modeling. The fiscal review process this year included a study of FHA's Home Equity Conversion Mortgage (HECM) program, which insures qualifying reverse mortgages made to senior homeowners. The HECM program in fiscal year 2009 boasted $29bn in endorsements in fiscal year 2009. Stevens and Donovan appointed Robert Ryan as the agency's new chief risk officer -- the first appointment under this role in the FHA's history. Ryan oversees the coordination of risk management efforts under a single division devoted to mitigating risk to the insurance fund across all lending programs. Among credit policy changes to take effect Jan. 1, 2010 at FHA are the requirement that supervised mortgagees submit audited financial statements and an effort to modify streamlined refinance procedures. FHA will also on January 1 require appraiser independence in origination, enable appraiser portability and modify the appraisal validity period. Among changes being pursued by a rule-making process are a modification of mortgagee approval and participation in FHA loan origination and an increase in the net worth requirements for mortgagees, FHA said. Write to Diana Golobay.