FHA finances improve markedly, but officials won’t cut premiums yet

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The Federal Housing Administration's key measure of mortgage-insurance fund soundness jumped to a 12-year high Thursday, renewing calls for premium cuts, but officials said other considerations argue against immediately making one.

"I don't think we're there yet, but it's something we’re looking at," Federal Housing Commissioner Brian Montgomery said when asked about the potential for premium cuts during a press call about the FHA's annual report to Congress. Changes to premiums have also been contemplated in housing reform proposals, he noted.

The Department of Housing and Urban Development's report showed the fund's capital reserve ratio was 4.84% during fiscal year 2019, marking a high not seen since FY 2007, and representing a substantial increase from 2.76% the previous year. The MMI fund is required by law to maintain at least a 2% capital reserve ratio.

"The financial health of the FHA's single-family insurance fund is as sound as it has been in over a decade," HUD Secretary Ben Carson said during the call.

HUD's report also showed the economic net worth of the FHA's Mutual Mortgage Insurance fund — which the FHA is now referring to as MMI capital — was up significantly at $62.38 billion. It was $34.86 billion a year ago.

"FHA's Actuarial Report shows continued financial strength, with the forward program net worth now almost two and half times the 2% statutory net worth requirement. In light of this, CHLA renews its call to end FHA's life of loan premium policy, to help FHA fulfill its access to credit responsibilities," Scott Olson, executive director of the Community Home Lenders Association, said in a statement the group issued Thursday.

"Realtors are pleased to see the strength of the MMIF Capital Ratio as it continues to meet the needs of first-time homebuyers, minorities and those underserved by the current market," Vince Malta, president of the National Association of Realtors, said in a statement. "However, the report also indicates current FHA buyers are paying premiums higher than necessary to cover taxpayer risks. As a result, NAR urges the FHA to consider reducing premiums and eliminating the life-of-loan policy, ensuring this critical market sector is not paying unnecessary fees to fund separate federal programs."

But while the report's numbers reflect many improvements in the MMI fund's financials, the FHA is unlikely to make a premium cut until more is done to protect its claims-paying ability against the possibility of a stressed scenario like the Great Recession.

Among other things, the FHA wants to do more to address the risk of its reverse-mortgage book. After reviewing new calculations related to its claims-paying capacity, the FHA found its reverse-mortgage portfolio would require an additional $16 billion in capital to withstand an event similar to the financial crisis.

The reverse mortgage program's capital ratio was markedly improved in FY2019 at negative-9.22% compared to negative-18.83% a year ago. Similarly improved was the MMI capital for the reverse mortgage book at negative-$5.92 billion. A year ago, the reverse mortgage program’s MMI capital was negative-$13.63 billion.

The FHA's traditional mortgage portfolio had a capital ratio of 5.44%, up from 3.93% a year ago; and the traditional mortgage book's MMI capital rose more than 42% at $66.6 billion in the past year.

In addition to the reverse mortgage portfolio, a high share of loans with risky underwriting characteristics stands as a continuing challenge to the FHA's claims-paying ability in a stressed scenario.

The FHA is "taking some actions" to address this, "but we haven't fully seen results," Keith Becker, the agency’s chief risk officer, said during the call.

The share of loans with debt-to-income ratios above 50% continued to grow in FY 2019, reaching the highest level since 2000 at 26%, Montgomery said during the call. In addition, cash-out refinances represented 16.14% of all FHA loans in FY 2019, up from 14.87% the previous year, and the share of loans with borrower credit scores below 620 rose to 12.73% from 11.21% in FY 2018.

In response to concerns about looser underwriting and reverse mortgages in the annual report, Robert Broeksmit, president and CEO of the Mortgage Bankers Association, issued a statement Thursday urging HUD "to continue to address 'extreme risk layering' quickly to protect the core of the [FHA] program, while exploring ways to ensure that premium levels for forward mortgages are not adversely impacted by the challenges in the HECM program."

"Together these actions will allow HUD to set premiums that reflect the improved health of the fund," Broeksmit added.

Another remaining concern the FHA seeks to address in regard to the MMI fund are claims related to loans with down payment assistance. While DPA advocates recently promoted research suggesting it's not a risk factor for mortgages, Montgomery said the FHA's numbers show claims for loans with down payment assistance are twice as high a claims for mortgages without it.

Overall, the early payment default rate of the FHA's mortgage book more than doubled in the past three years. It was 0.66% between FY 2017 and FY 2019 as compared to 0.31% between FY 2014 and FY 2016, according to HUD's report.

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Minimum capital requirements Reverse mortgages Brian D. Montgomery Ben Carson FHA HUD