Capital Reserves remain above statutory minimum for third straight year
The Federal Housing Administration (FHA) today released its 2017 Annual Report to Congress on the economic condition of the agency’s Mutual Mortgage Insurance Fund (MMI Fund). FHA reports that at the end FY 2017, the MMI Fund had a total economic net worth of $25.6 billion and the Capital Ratio that remains above the statutory minimum for a third straight year.
The MMI Fund supports FHA’s Single Family mortgage insurance programs, including all forward purchase and refinance transactions, as well as mortgages insured under the Home Equity Conversion Mortgage (HECM) or reverse mortgage program originated since FY 2009. While the MMI Fund remains above its minimum capital level, both the economic net worth and the capital ratio of the MMI Fund declined from levels reported last year. The Fund’s economic net worth fell $1.9 billion and the capital ratio declined from 2.35 to 2.09 percent from FY 2016.
“The fiscal health of FHA demands our constant attention and vigilance to ensure we can continue providing sustainable homeownership opportunities to working families without exposing taxpayers to excessive risk,” said U.S. Housing and Urban Development Secretary Ben Carson. “Our duty is clear—we must make certain FHA remains financially viable so future generations can build wealth and climb the economic ladder of success.”
This year’s report reflects a transition toward providing more transparency, consistency, and accountability, supporting FHA’s commitment to enhanced disclosure on the financial condition and sustainability of its Single Family mortgage insurance programs. For example, FHA is providing stand-alone capital ratios for its forward and reverse mortgage programs to better assess the impact of each on the MMI Fund. In addition, FHA is providing new data and analysis into the economic drivers impacting the performance of the MMI Fund, including stress-testing of the portfolio based on historical scenarios.
KEY HIGHLIGHTS FROM FHA’S 2017 ANNUAL REPORT
- The Fund’s FY 2017 Capital Ratio is 2.09 percent, a decrease from 2.35 percent in FY 2016. This is the third consecutive year this ratio exceeded the statutory minimum of 2.00 percent.
- The MMI Fund’s Economic Net Worth for FY 2017 is $25.6 billion, down from $27.6 billion for FY 2016. Economic Net Worth is comprised of Total Capital Resources of $39.7 billion and a negative Cash Flow NPV of $14.1 billion. Economic Net Worth declined by $1.9 billion from FY 2016.
- FHA’s cumulative Insurance-in-Force (IIF) reached approximately $1.23 trillion at the end of FY 2017, an increase of 4.8 percent from FY 2016.
- FHA endorsed 1,246,440 forward mortgages in FY 2017 (including 882,079 purchase loans) totaling $251 billion in Unpaid Principal Balance (UPB).
- First-time homebuyers accounted for 725,102 or 82.2 percent of all FHA forward purchase loans.
- The average loan amount of FHA-insured forward mortgages was $201,337.
- The average borrower’s credit score was 676 compared to 680 in FY 2016.
FHA’s FY 2017 CAPITAL RESOURCES
FHA maintains resources to cover both future claims, as well as an additional statutorily-required capital cushion of 2.0 percent of all Insurance-in-Force (IFF). This ‘Capital Ratio’ is calculated by dividing the Fund’s Economic Net Worth ($25.6 billion in FY 2017) by total IFF of approximately $1.23 trillion. As noted above, the FY 2017 Capital Ratio of the Fund is 2.09 percent, a slight decline from the end of FY 2016 when the Capital Ratio was 2.35 percent.
FHA believes that properly evaluating future policy decisions, such as adjustments to mortgage insurance premium rates and overall risk tolerance for the Single Family portfolio, requires assessing capital adequacy across a range of economic scenarios. This year’s Annual Report includes new and refined stress tests of the FHA portfolio, providing insight on the MMI Fund’s Capital Ratio under 100 historical economic scenarios, including highly stressful periods in the housing market.
This year’s report includes new stand-alone estimates of the capital resources and capital ratios for insured forward and Home Equity Conversion Mortgages (HECMs). This new reporting more accurately reflects the combined contributions of each program for the first time since HECMs became part of the MMI Fund in FY 2009.
The 2017 Annual Report finds the fiscal condition of FHA’s forward mortgage portfolio is materially better than the HECM portfolio. Excluding HECMs, FHA’s FY 2017 forward mortgages have a capital ratio of 3.33 percent, well above what Congress requires. FHA’s forward mortgages in FY 2017 have a positive economic net worth of $38.4 billion, contributing $4.2 billion to the Fund. By contrast, the 2017 HECM portfolio has a negative capital ratio of 19.84 percent and a negative economic net worth of $14.5 billion. FHA took several actions earlier this year to stabilize the HECM program, changes that will be reflected in next year’s annual report.
FHA MORTGAGE INSURANCE PREMIUMS
Immediately upon taking office, the Trump Administration indefinitely suspended a scheduled reduction in FHA’s annual forward mortgage insurance premiums as the agency assessed the economic impact on the MMI Fund. The 2017 Annual Report concludes that had this premium reduction taken effect in January, the MMI Fund’s Capital Ratio would have fallen to 1.76 percent (below the statutory minimum) resulting from a net reduction in cash flows of $3.2 billion and an increase in IIF of $45 billion.
FHA’s Home Equity Conversion Mortgage (HECM), or reverse mortgage program, continues to serve eligible seniors, 62 years and older, with a financing option that can help them remain in their home and age in place. As previously noted, the HECM portfolio has been a substantial economic drain on the MMI Fund. To place this program on a more fiscally sustainable path, FHA recently implemented a set of changes to mortgage insurance premiums, Principal Limit Factors (PLFs) and certain servicing requirements beginning in FY 2018. The impact of these changes on new endorsements, and the ongoing performance of the currently outstanding HECM portfolio, will continue to be closely monitored and managed by FHA. The 2017 Annual Report finds:
- HECM endorsements grew 13.1 percent since last year, with 55,291 new mortgages endorsed. The Maximum Claim Amount (MCA) of FY 2017 endorsements totaled $17.7 billion, a 20.3 percent increase over FY 2016.
- HECM claims continued to increase in FY 2017, rising to $5.0 billion, up from the $4.2 billion in claims paid in FY 2016. As a result, HECM’s net cash flow was negative 5.07 percent of HECM average Insurance-in-Force during FY 2017.
NEW INDEPENDENT ACTUARY
Pinnacle Actuarial Resources, Inc. (Pinnacle) served as the independent actuary for FY 2017. By serving as a critical check on the results, an independent actuarial review remains an integral part of the Annual Report process. Pinnacle’s independent actuarial review reports for forward mortgages and HECM, confirming that the estimates used in the FY 2017 Annual Report to calculate the capital ratio are reasonable, are contained in the Annual Report.