November 17, 2014
FHA’s Financial Health Looking Up
HUD has released the Annual Report to Congress Regarding the Financial Status of the Mutual Mortgage Insurance Fund Fiscal Year 2014. It appears that things are looking up for the FHA, particularly after last year’s mandatory appropriation from the Treasury, the first in the FHA’s 80 year history. For those of you who are not housing finance nerds, the Mutual Mortgage Insurance Fund (MMIF) is the financial backbone of the FHA’s single-family mortgage insurance program. When it is in bad shape, the FHA is in bad shape.
As Secretary Castro notes in his forward to the report,
The value of the Fund has improved significantly, now standing at $4.8 billion. The increased economic value represents a capital reserve ratio of 0.41. This improvement shows tremendous progress, especially considering that the Fund had a negative value of $16.3 billion just two years ago. The two-year gain in Fund value is an impressive $21 billion. The performance of the portfolio has improved dramatically in a short period of time. Foreclosures are down 68 percent since the height of the crisis and recoveries to the Fund have improved 68 percent from their lowest level–saving billions of dollars. While FHA must still respond to challenges presented by legacy books and market volatility, the independent actuary’s report demonstrates that FHA is firmly on the right track and is projected to continue improving. (1)
The MMIF is supposed to have a capital reserve ratio of 2 percent, so the FHA is still quite a bit away from receiving a clean bill of health. But according to projections, it should achieve that level in 2016 and then continue to improve from there. (35, Ex. II-3)
While this is all pretty abstract, there are some pretty concrete aspects to the health of the MMIF. The size of FHA premiums, paid by homeowners borrowing FHA-insured mortgages, is set in the context of the health of the MMIF because the FHA is a self-funded government agency. So low reserves means that it is harder to cut premiums. Higher FHA premiums mean that mortgages are more expensive for the low- and moderate income borrowers who make up a large part of the FHA’s book of business. So the health of the MMIF is an indicator of sorts of the health of the housing market overall.
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