FHA Reserves — The Rest of The Story

by Peter G. Miller
November 16th, 2009

As universally predicted, the FHA says that its capital reserves have fallen during the past year and are now less than 2 percent of the mortgage insurance the program has in force.

However, it appears that many headlines do not reflect what HUD actually had to say about the program. Yes, the capital reserve has fallen to $3.6 billion — BUT there are additional reserves. As HUD explains:

“FHA’s capital reserve ratio, which is determined through findings from the independent actuarial study, measures reserves held in excess of those needed to cover projected losses over the next 30 years.  The review projects the capital reserve ratio to be 0.53 percent of total insurance in force this year, below the two-percent statutory threshold.  This capital ratio fell from 3 percent in the fall of 2008, reflecting difficult conditions in the housing market. The 0.53 percent capital ratio (which represents the funds held in the Capital Reserve Account) is in addition to the auditor’s base case estimate of the 30-year reserves needed to pay for losses on existing loans (which are held in the Financing Account).  Combining those two accounts, FHA holds $31 billion in its total reserves today, or more than 4.5 percent of total insurance-in-force.

In other words, no bailout is required.


The situation with the FHA is hardly unique — the private mortgage insurance industry lost $5.8 billion in 2008 and the figures for 2009 also look glum.

“After a record drop in the housing market,” says HUD, “the FHA is now helping to facilitate the market’s recovery.  The volume of FHA insurance guarantees has increased since 2008, as private sources of mortgage finance have retreated from the market.  Nearly 80 percent of FHA’s purchase-loan borrowers in 2009 were first-time homebuyers.  In the second quarter of 2009, nearly 50 percent of all first-time buyers in the entire housing market used FHA-insured loans.  The new lending is being done as FHA has halted the seller-financed down payment assistance program, tightened underwriting standards on streamline refinances, increased oversight of lenders, and is considering additional prudent measures. The quality of new loans insured by FHA has improved on several metrics including average borrower credit score; the average borrower FICO score today is 693 compared to 633 two years ago. Additionally, FHA insured more than 835,000 refinances in FY 2009 to lower interest rate loans, enabling borrowers to save an estimated total annual savings of $1.3 billion.”


To understand why some in the financial community are so opposed to the FHA notice the last sentence: the “FHA insured more than 835,000 refinances in FY 2009 to lower interest rate loans, enabling borrowers to save an estimated total annual savings of $1.3 billion.”

Can you imagine how many loans would not be refinanced if the FHA did not exist? Can you imagine how many of those new private-sector loans would have had prepayment penalties and other costly gimmicks?

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