Financial Footing of FHA Portfolio Improves for Forward—Falls for Reverse

The financial footing of the Federal Housing Administration’s forward portfolio improved in 2014, while the reverse portfolio remained in negative territory.

According to an annual actuarial report on FHA’s Mutual Mortgage Insurance Fund, the fund’s overall net worth has improved by $6.1 billion in fiscal year 2014 — increasing from negative $1.3 billion to positive $4.8 billion. Its current capital ratio is 0.41%.

While the standing of the forward portfolio improved vastly, the Home Equity Conversion Mortgage portfolio showed a sharp downturn and resulting negative capital reserve ratio at -1.2%.

The economic value of the forward loan portfolio improved by $13.8 billion from negative $7.9 billion to positive $5.9 billion, the annual reported finds. For the HECM portfolio, however, the economic value deteriorated from positive $6.5 billion back into negative territory at negative $1.2 billion during the fiscal year.

The agency pointed to the signs of improvement as a positive for FHA, highlighting $40 billion in cash reserves, a 30% drop in serious delinquency rates and 68% improvement in recovery rates, among other metrics.

“This year’s report shows that the fundamentals of the Fund are strong,” said HUD Secretary Juliàn Castro in a press release. “Over the past five years, FHA has taken a number of prudent actions to restore the Fund’s fiscal health. This is positive news for the economy and the millions of American families that count on FHA.”

For the HECM portion of the fund, however, the actuaries noted recent product changes that are continuing to work toward improvement of the insurance fund, but the results of which remain to be seen.

While the HECM portfolio is smaller than the forward portfolio, changes to the reverse mortgage program have netted serious changes to the portfolio overall. Under worse-case scenario assumptions, the actuaries found the HECM portfolio to be much more susceptible to changes.

“When taking into account the difference in portfolio size… FHA concludes that the HECM portfolio is well over ten times more volatile than the Forwards,” the report states. “All this suggests that small changes to the HECM program can exert a relatively large impact on the overall value of the portfolio.”

Forward projections show headwinds for the HECM portfolio as well, but it’s unclear whether changes made during fiscal year 2014, and planned for fiscal year 2015, have yielded results.

“Due to the nature of the HECM product, there are two unique aspects to managing policy: 1) the portfolio is highly sensitive to small changes and 2) the impact of policy changes on the portfolio does not become apparent immediately,” the report states. “It is still too soon to know what impact these changes will exert on the HECM program. Therefore, FHA will continue to monitor progress of actions taken to date and continue to make further adjustments to the program as needed, just as we have in 2013 and 2014.”

Industry participants welcomed the news on the improvement in the portfolio overall, stressing a need for ongoing attention to the forward program, including mortgage insurance premium policy.

“It is extremely welcome news that the Federal Housing Administration is back in the black,” said Julia Gordon, Director of Housing Finance and Policy at the Center for American Progress. “The agency has played a crucial role in supporting our economic recovery, preventing not only even more catastrophic home price declines, but also a double-dip recession.

The MBA’s President and CEO David Stevens, who also served previously as FHA commissioner, also touted the gains in in the portfolio as an indicator for improvement in the housing market overall.

“Today’s report shows a continued improvement in economic value of the MMI Fund, with the fund having improved by $21 billion in the last two years,” Stevens said in a statement. “This trend is good news for taxpayers and the program, as almost all of the vital metrics, including delinquencies, foreclosures, and recoveries on property disposition, continue to improve.”

Written by Elizabeth Ecker

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