FHA Audit Shows Insurance Fund at Negative $13.48 Billion

The Federal Housing Administration’s current book of business is valued at negative $13.48 billion reports the Wall Street Journal based on a pre-release of the annual FHA audit late Thursday.

Additional reports indicate the audit will show FHA’s reverse mortgage (Home Equity Conversion Mortgage) Portfolio being valued at negative $2.799 billion at the end of fiscal year 2012.

Analysts and policy experts expected a substantial shortfall in the fund’s performance for fiscal year 2012, predicting that FHA would require a capital infusion from the treasury for the first time in history to help cover losses. Excerpts posted by Calculated Risk included the financial information provided by FHA’s independent actuarial review.

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“Based on our stochastic simulation analysis, we estimate that the economic value of the Fund as of the end of FY 2012 is negative $13.48 billion. This represents a $14.67 billion drop from the $1.19 billion estimated economic value as of the end of FY 2011….” and in comments provided about the HECM portfolio  “The FY actuarial review of FHA’s HECM business concluded that the “economic value” of the current FHA HECM book was NEGATIVE $2.799 billion at the end of FY 2012.”

Independent auditors estimate there is approximately a 5 percent chance that FHA’s capital resources could turn negative during the next 7 years. “We also estimate that under the most pessimistic economic scenario, the economic value could stay negative until at least FY 2019,” they said in the report.

During a press conference in Washington, DC, House Financial Services Committee Chairman Spencer Bachus said that FHA is expected to propose increasing the premiums it charges to insure mortgages as a solution according to Bloomberg.

RMD will provide updates as more information becomes available. The report is expected for official release Friday according to an FHA spokesman.

Written by Elizabeth Ecker with additional reporting by John Yedinak

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  • It’s foolish to think that increasing the MIP will solve the problem.  The claims will continue to mount so trying to match the claims with increase premiums is impossible.  The only rational solution is to lower the Principal Limit Factors to make the program less generous.
    Remember, it’s about saving a housing program not the reverse mortgage industry.It is also nonsense to think HUD’s so called current “book of business” is of a better quality than the older stuff because even though we cherry picked the pipeline for better properties and better borrowers we granted a large percentage of them a fixed rate lump sum which will exacerbate the claims going forward.Lowering the PLF’s in the only solution.

    • You overstate the case.  

      It is not impossible to make it work but it is NOT the straight forward computation many believe it would be.  While increasing MIP only impacts those HECMs which are not underwater at termination, lowering the principal limit factors reduces the loss on all HECMs which would otherwise be underwater at termination.

    • Do you want to bring more borrowers underwater?  Your expression means that higher PLFs would be available at lower expected interest rates.  How does that help anything except put more loans in jeopardy?

      • No, I wouldn’t want to “bring more borrowers underwater”.  Currently, one can borrow the max PLF at 5.06% fixed.  I am suggesting that, moving forward, the max be available only at 4.5% or lower.  New fixed rate loans originated at 4.5% would take longer to hit the 98% of max claim figure.  It would be beneficial to the FHA insurance fund and to the borrower.  I could even see an argument for setting the floor at 4%.  When rates rise in future years, you’d hope home appreciation rates would be better and the floor could rise back to where it is now.  This strategy would reduce the total YSP available to all parties involved, but that should be the least of our concern with the potential changes HUD has been mentioning.  

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