FHA Replenishes Fund, Expects to Meet 2% Reserve Mandate by 2015

More than a year after reporting a shortfall of $16.3 billion in the Federal Housing Administration’s (FHA) Mutual Mortgage Insurance (MMI) fund, HUD announced significant improvements in the agency’s financial situation—though the fund remains in the red.

An actuarial report released Friday shows FHA’s insurance fund for single-family home loans has regained $15 billion dollars in value over the last year, bringing it to -$1.3 billion dollars and a capital ratio of -0.11 percent. By law, the federal insurer is supposed to maintain a capital reserve ratio of 2 percent, a goal it expects to meet in 2015.

As of now, the agency maintains more than $48 billion in liquid assets to pay expected claims.

“What is clear from the independent actuarial report is that the aggressive steps we have taken have made FHAstronger and put it on a sustainable path to fulfill its dual mission of supporting access to homeownership for underserved and low-wealth borrowers as well as supporting and stabilizing the housing market,” said HUDSecretary Shaun Donovan.

“We look to the future and remain committed to continuing our progress to strengthen the MMI Fund so that ladders of opportunity are available to all Americans for generations to come,” he added.

The actuarial report points to a number of factors driving the improvement in FHA’s finances, including declines in early payment defaults—to their lowest levels in seven

years, thanks to improved underwriting in more recent books of business—and drops in serious delinquency and foreclosure rates as a result of enhanced loss mitigation efforts.

To keep up the momentum, FHA says it plans to continue pushing for further legislative changes that would allow the agency to seek indemnification from all classes of approved lenders, grant the authority to terminate approval on a national—rather than regional—basis, and facilitate servicing by specialty servicers.

Though FHA still has some ground to make up, Friday’s news was taken as a largely positive sign by industry groups.

“Today’s report, while recognizing FHA’s current shortfall, shows clear improvement over last year and is a sign that the MMI Fund is headed in the right direction and could soon be positive,” said David Stevens, president and CEO of the Mortgage Bankers Association (MBA), adding that with a tighter credit environment on the horizon, “policymakers must continue to protect and improve theMMI fund in order to ensure that FHA can serve its critical mission in the single family market.”

On the other hand, FHA’s critics are likely to be less than impressed—in particular Rep. Jeb Hensarling (R-Texas), who has proposed legislation to reform FHA and drive down the government’s presence in the market.

In a November op-ed for the Washington Times, Hensarling criticized FHA Commissioner Carol Galante’s moderate approach to revising the agency’s practices, saying FHAhas “refused to make full use of the tools it has at its disposal, such as raising premiums to their maximum or increasing minimum down payments.”

His criticism carries heavy weight in light of the fact thatFHA just recently had to take its first-ever taxpayer-funded bailout.

“Americans deserve and demand a healthy economy. We cannot borrower, spend or bail out our way to prosperity,” he goes on to say in the Washington Times piece. “If government continues to dominate the housing market, we may never have a truly healthy and sustainable economy.”

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