The audit for the Federal Housing Administration found the mutual insurance fund short a projected $13.48 billion. However, it could have been worse, if not for the separation of REOs and pre-forelcosures on FHA books.

Capital resources for the year was negative $2.34 billion, which was impacted by five factors including an estimated decrease of $0.45 billion in real-estate owned inventory.

This year the FHA introduced the claim-type prediction model to separate REO claims and pre-foreclosure claims, according to the recent audit submitted to Congress, resulting in a decrease of $5.04 billion for the year and an expected decrease of $6.46 billion in 2018.

Distribution between REO and pre-foreclosure claims were relatively stable until widespread declines in home prices and higher volumes of defaults started to impact the fund in 2009. As a result, foreclosure claims became prolonged and delayed.

In previous years, historical average claim rates between REOs and pre-foreclosures were used to forecast future years. However the delay in claims decreased more REO counts than pre-foreclosure counts, so to avoid any biased delays the claims are now separately accounted for.

Click on the chart to view distribution between REO and pre-foreclosure claims:

"We assume that approximately 20 percent of the model projected REO liquidations would take the form of asset sales instead of foreclosure and the loss rate of the asset sales will gradually converge to the loss rates on REO dispositions during the next two years," according to the report.

Click on the chart to view REO loss rate.

cmlynski@housingwire.com