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HUD Admits FHA Fund Went Negative—But Says It Will Be ‘Positive’ Within a Year

NOV 15, 2012 10:03pm ET
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The Department of Housing and Urban Development late Thursday admitted that the FHA Mutual Mortgage Insurance Fund is in the red by at least $16.3 billion with a negative capital ratio of 1.44%.

However, the agency declared that it will announce “a series of changes” Friday that are “designed” to put the MMI back in a positive position “within the year.”

Among other things, industry officials expect yet another hike in FHA premiums which will become operative within months.

HUD says its accountants anticipate at least $11 billion in additional capital flowing into the MMI in fiscal 2013 thanks to premiums from new business. It says the announced changes will “reduce the likelihood” that FHA will need to tap a line of credit it has with the U.S. Treasury.

In a press statement, the agency said just because the MMI has a “negative economic value of $16.3 billion…This does not mean FHA has insufficient cash to pay insurance claims, a current operating deficit, or will need to immediately draw funds from the Treasury.”

It notes: “The need to draw on Treasury funds is determined not by the economic assumptions of this actuarial review but those used in the president’s FY 2014 budget proposal to be released in February, with a final determination on a potential draw made in September. Also, the actuary’s estimate of the Fund’s economic value excludes $11 billion in expected capital accumulation through the end of FY 2013.”

On Thursday night FHA acting commissioner Carol Galante added, “While the loans made during this Administration remain the strongest in the agency’s history, we take the findings of the independent actuary very seriously. We will continue to take aggressive steps to protect FHA’s financial health while ensuring that FHA continues to perform its historic role of providing access to homeownership for underserved communities and supporting the housing market during tough economic times.”

As for drawing any cash from Treasury the agency is telling the public that the need to draw funds “is determined not by the economic assumptions of this actuarial review but those used in the President’s FY 2014 budget proposal to be released in February, with a final determination on a potential draw made in September.”

Also, the actuary’s estimate of the fund’s economic value excludes $11 billion in expected capital accumulation through the end of FY 2013.

FHA acting commissioner Carol Galante added, “While the loans made during this Administration remain the strongest in the agency’s history, we take the findings of the independent actuary very seriously. We will continue to take aggressive steps to protect FHA’s financial health while ensuring that FHA continues to perform its historic role of providing access to homeownership for underserved communities and supporting the housing market during tough economic times.”

Ed Pinto, a  resident fellow at the American Enterprise Institute, said, "The FHA must reduce its tolerance for risk and return to its traditional mission. The best way to do that is to reduce the risk layering combining (low FICO, low down payment, high debt ratios and/or slowly amortizing 30 year term) on its high risk mortgages."

 

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