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FHA Insurance Fund Posts Gain Despite Heavy Losses in '03

The Federal Housing Administration's capital ratio rose to 5.21% in fiscal year 2003 from 4.52% in FY 2002, but capital reserves rose by only $100 million to $22.7 billion, according to the annual actuarial report prepared by Deloitte & Touche.

"Two large offsetting impacts" contributed to the increase in the capital ratio, the auditors said. The quality of FHA single-family loans endorsed in FY 2003 increased the economic value of the FHA mortgage insurance fund by $2.8 billion.

"Countering this effect is the extraordinarily high prepayment activity that has adversely impacted the FHA's economic value during FY 2003, as well as the claim activity that has exceeded the levels predicted in our 2002 study," the Deloitte & Touche report says.

FHA loan endorsements totaled $147.4 billion in FY 2003, but runoff totaled $193.2 billion. The FHA portfolio fell to $382.2 billion in FY 2003 from $435.4 billion the previous year, according to Bush administration budget documents.

Meanwhile, claims from defaulted loans jumped from $3.9 billion in FY 2002 to $7.3 billion in FY 2003. (The 2003 fiscal year ended Sept. 30, 2003.)

A rising serious default rate (90 days or more past due) and a higher number of foreclosures took their toll.

An FHA portfolio report shows that single-family foreclosures increased from 64,245 in FY 2002 to 73,254 in FY 2003. The number of loss mitigation claims filed by FHA lenders totaled 64,245 in FY 2003, down 1% from FY 2002.

As of Sept. 30, the FHA had a serious delinquency rate of 6.21%, up from 4.45% as of Sept. 30, 2002.

Deloitte & Touche started doing the actuarial report in 1999 and each year the auditors note that the FHA's loss mitigation program is expected to reduce foreclosures. But they have not been able to estimate the program's effect on FHA claim rates. "The relatively short history of the program makes it difficult to incorporate [loss mitigation] in the conditional claim rate models," the D&T auditors say.

Nevertheless, the auditors expect the economic performance of the FHA single-family insurance fund to improve based on the quality of new originations.

The FHA fund will end FY 2004 with a 5.7% capital ratio and $27.7 billion in capital reserves, according to the actuarial report.

In fiscal 2003, the FHA insured nearly 1.4 million single family mortgages with a total dollar volume of over $147 billion, an all time high for the agency.

Through the first four months of fiscal 2004, which began in October, the FHA had insured 423,000 mortgages totaling $50.7 billion.

In recent congressional testimony, FHA Commissioner John Weicher said the activity is consistent with the FHA's prediction that it will do $143 billion of new business this year.

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