FHA’s Mutual Mortgage Insurance Fund

daveblogfhapic

This week, the Federal Housing Administration (FHA) released its annual report to Congress on the financial condition of the Federal Housing Administration’s Mutual Mortgage Insurance (MMI) Fund for single family programs. The independent actuarial analysis showed the MMI Fund’s capital reserves grew by $3.8 billion and the capital reserve ratio now stands at 2.32 percent—the second consecutive year that FHA’s reserve ratio exceeded the congressionally required two percent threshold. This is welcome news, as the health of the fund is important to our industry.

FHA and its leadership should be commended for the steps they have taken since the economic crisis to increase the value of the FHA MMI fund. Their actions have helped to facilitate access to homeownership for hundreds of thousands of low and moderate income families.  The core strength of FHA’s forward book of business is representative of growing stability in the overall housing market.

While FHA has enough money in its reserve funds to cover the cost of insuring loans, an important subtext to this report is the continued volatility with Home Equity Conversion Mortgage (HECM) loans, or reverse mortgages, which dragged down the overall value of the MMIF this year, after adding value to the fund in the previous year. Given the importance of FHA loans to low and moderate income and first time homebuyers, the next administration should look at accounting for the two programs individually in order to isolate the critically important forward book from the wild swings of the HECM fund.

My fear is a scenario where the accounting in the HECM program drives the entire reserve ratio below two percent, even while the forward FHA book is healthy.  Such an event could cause an immediate political overreaction that could do harm to the FHA program and the underserved borrowers it was created to help.

I recognize that the current health of FHA is causing some to call for a reduction in FHA fees. While it is an issue worth considering, it must be done carefully and with an eye to the long run. I would again point to the vulnerability to the reserve fund posed by the volatility in the HECM book. And given the HECM volatility and recent concerns about liquidity in the Ginnie Mae market, any changes to FHA fees must first and foremost ensure the long-term financial and political stability of the FHA program.

Going forward, MBA will be engaged with FHA to evaluate options that balance the need to ensure affordability for FHA borrowers, maintain actuarial soundness, and preserve stability in the Ginnie Mae mortgage backed security and mortgage servicing rights markets. FHA has and will continue to play a critical role in the housing market. The service FHA provides to first-time homebuyers and low- to moderate-income households is vital to the health and growth of the real estate finance market.