Revealing that the agency’s Mutual Mortgage Insurance (MMI) Fund reached a 12-year high for Fiscal Year 2019, the Federal Housing Administration (FHA) instilled optimism in the mortgage industry with its Annual Report to Congress. The report also highlights continued improvements in the struggling reverse mortgage marketplace and an increase in the small percentage of mortgages with multiple “extreme risk” factors.
The fund recorded a capital ratio of 4.84 percent for FY 2019, the highest level since FY 2007, according to the report.
The MMI Fund supports FHA’s single-family mortgage insurance programs, including all forward mortgage purchase and refinance transactions, as well as mortgages insured under the Home Equity Conversion Mortgage (HECM) since FY 2009.
“The financial health of FHA’s single-family insurance fund is as sound as it has been in over a decade,” Department of Housing and Urban Development (HUD) Secretary Ben Carson said in a press release. “We have a strong economy with nearly full employment due to President Trump’s leadership, and this economic growth helps set the foundation for ongoing improvements in our FHA portfolio.”
Specifically, FHA Commissioner Brian Montgomery attributed the “welcome news” about the MMI Fund to various actions the agency has taken to reduce losses related to reverse mortgages.
“The improvements we’ve begun to put in place in the last two years to stem the losses of the reverse mortgage portfolio, aided by favorable economic conditions, are contributing to some improvements in our reverse mortgage portfolio,” Montgomery said. “Looking forward, we must focus on seeking the right balance between facilitating access to mortgage credit and managing risk. Our mission is to make certain FHA remains a stable and reliable resource to provide housing finance support for first-time homebuyers, and other underserved borrowers.”
The report notes that FHA finished the fiscal year with insurance-in-force on single family mortgages valued at nearly $1.3 trillion. It also states that FHA recorded a stand-alone capital ratio of 5.44 percent for its forward book of business in FY 2019, and the MMI Capital (formerly referred to as economic net worth) of the forward book of business improved by more than 42 percent, year-over-year, to more than $66.6 billion.
Although the results in this report are directionally positive, its report said, FHA must strengthen its portfolio if it is to capably fulfill a role as a countercyclical source of mortgage credit, particularly during periods of market distress, and ensure taxpayers are protected from unnecessary risks. In the multi-agency Housing Finance Reform Plan released in September, FHA proposed a number of solutions that would reduce risks to the MMI Fund, protect taxpayers from future bailouts, and ensure the FHA maintains its focus on providing access to mortgage financing to low- and moderate-income families that cannot be fulfilled through traditional underwriting. Reforms should not and need not wait on legislation, it stated, and the agency is implementing the proposals for which HUD has authority in the absence of further Congressional action.
The HECM portfolio continued to show a negative stand-alone capital ratio in FY 2019, but improved nearly 9 percent (from -18.83 percent in FY 2018 to -9.22 percent in FY 2019), the report states. The HECM portfolio also improved in MMI Capital for the year, posting a $7.7 billion increase.
“This clearly shows the progress we have made toward stabilizing the HECM portfolio’s financial drain on the MMI Fund,” Montgomery said in the report’s foreword remarks. “Further, we expect that policy changes made this past fiscal year to address the volume of forward mortgages with layered risk characteristics will show measurable results in FY 2020. We also believe that our outsized share of cash-out refinance transactions will be moderated or even reduced next year as a result of recent policy changes to bring cash-out refinance maximum loan-to-value ratios into alignment with the rest of the industry.”
Mortgage Bankers Association (MBA) President and CEO Robert Broeksmit commended the work HUD has done to strengthen and grow the MMI Fund under Carson.
“It is a clear sign that HUD is responsibly fulfilling its core mission of helping first-time homebuyers and other underserved borrowers attain affordable, sustainable credit without exposing taxpayers to unreasonable risk,” Broeksmit said in a statement. “The fund’s capital ratio, which is now more than twice the statutory minimum, indicates that HUD’s policy changes over the last few years have had their intended effect of stabilizing the fund and rebuilding reserves in order to prepare for any future downturns.”
The news of the fund’s health also was welcomed by Rebeca Romero Rainey, president and CEO of the Independent Community Bankers of America (ICBA).
“ICBA is pleased to see the FHA Single-Family Mutual Mortgage Insurance Fund capital ratio has recovered to 4.84 percent and is well above the statutory minimum of 2.0 percent,” Romero Rainey said in a statement. “Improved risk management practices by the FHA and an effective premium structure buoyed by a strong housing economy have resulted in successfully rebuilding the fund, which protects taxpayers. ICBA congratulates the Department of Housing and Urban Development on this achievement and looks forward to working with FHA staff to ensure the continued strength of the Single-Family Insurance Fund.”
Broeksmit stated that HUD should act to address the rising problem of “extreme risk layering,” which refers to mortgages with more than one of three critical risk factors that tend to lead to higher than average default rates.
“We encourage HUD to closely monitor risks to the fund, including the layering of risks that could contribute to future defaults, as well as oft-cited challenges associated with the HECM program,” he stated. “MBA urges HUD to continue to address ‘extreme risk layering’ quickly to protect the core of the program, while also exploring ways to ensure that premium levels for forward mortgages are not adversely impacted by the challenges in the HECM program. Together, these actions will allow HUD to set premiums that reflect the improved health of the fund.”
The three risk factors that characterize such mortgages are: debt-to-income (DTI) ratios greater than 50 percent; less than two months of capital reserves; and borrowers with credit scores below 640.
The report indicates that the share of mortgages with three risk layers has grown from 0.4 percent in 2014 to 2.9 percent in 2019.