The US Department of Housing and Urban Development issued a statement saying that an independent study released shows that Federal Housing Administration (FHA) has sustained significant losses from loans made before 2009.

According to a statement from HUD, the capital reserve ratio has fallen below the congressionally mandated threshold, but concludes that under most economic scenarios considered FHA’s reserves would remain above zero.

Part of the independent study included an actuarial review of FHA’s reverse mortgage program to assess the adequacy of the current and future capital resources to meet estimated cash outflow requirements.

The study estimates that the economic value of the HECM portion of the MMI fund at the end of FY 2009 to be $909 million, indicating that there are sufficient capital resources to meet the anticipated liabilities associated with the HECM portion of the MMI Fund.

It added that it estimates the economic value of the HECM portfolio will continue to increase over time with the addition of new books-of-business and improvements in forecasted economic conditions. The estimated economic value of the reverse mortgage portfolio at the end of FY 2016 is $19.8 billion.

The economic value of the HECM portfolio in the MMI fund is projected to grow at a faster rate than the insurance-in-force, representing an increasing ratio of
the program’s present value to its insurance risk over time. Table ES-1 provides the economic value, MCA, and endorsements for FY 2009 to FY 2016.

The study also states that:

On September 23, 2009, HUD announced a 10 percent reduction in the principal limit factors for all loans originated in FY 2010.2 The announcement was made after the economic value analysis of this review and the impact of the PLF reduction is not included in these estimates.

The principal limit factor reduction decreases the ratio of the amount of initial equity available to the MCA at origination, and is expected to reduce HUD’s insurance risk. As a result, with all other modeling assumptions held constant, the actual economic value of the FY 2010 book-of-business is expected to be greater than the estimate
presented in this review.

To read a copy of the actuarial study click the link below.

FY 2009 Actuarial Review of HECMs