CBO: FHA Reform Bill Would Save $514 Million

A proposed Senate housing bill would save the government more than $500 million in its efforts to strengthen the Federal Housing Administration’s (FHA) mortgage insurance fund, a new estimate finds. 

If passed, the Senate-proposed FHA Solvency Act of 2013 (s. 1376) could save the federal mortgage insurer $514 million over a four-year period from 2014-2018, according to estimates from the Congressional Budget Office (CBO).

The bill aims to make several changes to current law by improving the financial security and stability of the FHA’s Mutual Mortgage Insurance (MMI) fund. 

Advertisement

Under S. 1376, FHA would be required to take certain correct actions if the annual actuarial review of the MMI fund indicates that the capital reserve ratio has fallen below certain targets, says CBO.

The bill would also allow FHA to make other administrative changes to the processes they use to oversee the single-family and HECM programs—authority long sought for by FHA.

The MMI fund, which backs FHA’s single-family mortgage guarantee program and the Home Equity Conversion Mortgage (HECM), revealed a $16.3 billion shortfall during a November 2012 actuarial review.

The same review also revealed that the FHA had a capital reserve ratio of -1.44%, considerably lower than the 2% ratio the agency is required to maintain by law. This led to the agency requesting a $1.7 billion capital infusion from the U.S. Treasury.

While currently the FHA is required to maintain its 2% capital ratio, enacting S. 1376 would require FHA to evaluate the premiums it charges for mortgage insurance on an annual basis.

The legislation would also require FHA to achieve a capital ratio of 3% within 10 years of the bill’s enactment, and would establish additional reporting requirements and programmatic changes if the MMI fund does not meet certain targets as it builds toward achieving the 3% ratio. 

For example, FHA would be required to impose a 10% surcharge on its guarantees if the actuarial report for 2016 reveals that the capital ratio is less than 1.25%.

While CBO does not expect FHA to impose this surcharge in 2016, it does, however, expect the agency to increase its initial and annual insurance premiums beginning in 2018 in order to meet the 3% capital ratio requirement for the MMI fund by 2023. 

CBO estimates that these reporting requirements and other administrative activities required to maintain “adequate capital balances” in the MMI fund would cost $10 million over the 2014-2018 period. 

The bill would not affect direct spending or revenues, CBO states, so pay-as-you-go procedures do not apply.

Written by Jason Oliva

Join the Conversation (2)

see all

This is a professional community. Please use discretion when posting a comment.

  • The last sentence in this quotation is conjecture: “The same review also revealed that the FHA had a capital reserve ratio of -1.44%, considerably lower than the 2% ratio the agency is required to maintain by law. This led to the agency requesting a $1.7 billion capital infusion from the U.S. Treasury.”

    The fact is the $1.685 billion was transferred to exactly offset the estimated negative net position of the MMI Fund as of 9/30/2013 per the written testimony of FHA Commissioner Galante presented to the House Committee on Financial Services dated 10/29/2013. After the transfer the estimated capital reserve ratio of the MMI Fund is 0%.

    Per the testimony of the Commissioner, before the transfer, the HECM portion of the MMI Fund was $5.151 billion negative and the other programs $3,466 billion positive making a total negative net position of $1.685 for the entire MMI Fund. Technically the transfer was not based on a request but rather a legal requirement under the Federal Credit Reform Act of 1990.

  • Let us be clear that FHA did not request the transfer of close to $1.7 billion, it simply demanded it as is allowed under the Federal Credit Reform Act of 1990 (“FCRA”). Also the demand had absolutely nothing to do with not meeting the capital reserve requirement of 2%.

    The FCRA states that if the net position of the Mutual Mortgage Insurance (“MMI”) Fund is negative, FHA has the right to demand a transfer of funds out of Treasury to offset such net cumulative loss. FHA cannot demand under any existing law that Treasury also transfer sufficient funds to meet the additional 2% capital reserve requirement.

    FHA Commissioner Galante presented how the amount transferred was calculated in her written testimony to the House Committee on Financial Services, dated 10/29/2013. It turns out that as of that date FHA was estimating that the net position of the MMI Fund was negative by $1.685 billion. That amount is a combination of the HECM portion of the MMI Fund being $5.151 billion negative as of 9/30/2013 and the other programs being $3.466 billion positive as of that date.

    This means that despite the actuarial estimate of the HECM portion of the negative net position of the MMI Fund being reduced as of 9/30/2013 from $2.799 billion as of 9/30/2012, FHA is now predicting that it is almost twice as much at $5.151 billion negative.

    It will be interesting to hear why things are so much worse than was being projected in November 2012. House values have not been dropping in that almost twelve month period and the actuaries did not envision the end of fixed rate Standards on 3/31/2013. So what has caused this really negative turnabout, especially when it is FHA making this estimate rather than either the actuaries or the auditors?

    No doubt the transfer will go into the HECM portion of the MMI Fund. That means that in the last four fiscal years, the HECM portion of the MMI Fund has seen almost $4 billion transferred into it. During fiscal 2010, $1.748 billion was transferred in; during fiscal 2011, $0.535 billion came in; and now at the end of fiscal 2013, there is $1.685 billion more for a grand total of $3.968 billion. Yet after all of this transferring, the HECM portion of the net position in the MMI Fund will still be negative by $3.466 billion.

    So what is FHA’s explanation for all of these losses especially during fiscal 2013 when home values were increasing much greater than at an annual rate of 4% in most areas? Remember all we are talking about are HECMs which were endorsed after 9/30/2008.

string(87) "https://reversemortgagedaily.com/2013/11/19/cbo-fha-reform-bill-would-save-514-million/"

Share your opinion