Rising FHA capital ratio prompts more calls for premium cuts

The capital ratio of the Federal Housing Administration’s Mutual Mortgage Insurance Fund increased 3 percentage points for fiscal 2022, according to its annual report on financial condition to Congress.

But during a media call on the report, Federal Housing Commissioner Julia Gordon reiterated past comments that any potential mortgage insurance premium reduction would not be addressed until a new federal budget for the current fiscal year is in place.

FIMM’s capital ratio was 11.11% as of September 30. Its year-over-year increase in percentage points is the largest in five years. For financial year 2018, the MMIF had an equity ratio of 2.76%; the following year it increased at 4.84%then 6.1% in 2020 and at 8.03% for 2021.

This should give the Fund, used to pay mortgage insurance claims, the ability for the FHA to play a countercyclical role in supporting housing finance, especially if other market players pull back. Nonetheless, given the headwinds in the housing market in the second half of 2022, capital accumulation for the MMIF is expected to slow in the near term, the report notes.

The increase in the capital ratio added fuel to the fire for a pair of mortgage industry trade groups advocating a reduction in the MIP.

“Community Home Lenders of America renews its long-standing call for FHA to reduce annual premiums and end its loan life policy, following today’s MMIF financial report showing growing reserves and a net worth of more than 5.5 times its legal requirement,” a statement from the organization said. “The CHLA appreciates the technical budget rating issues raised by the premium cut – but the doubling of mortgage rates since the start of this year makes these actions more critical than ever.”

At more than five times the legal minimum reserve of 2%, the MMIF is well positioned to weather an economic downturn, Bob Broeksmit, president and CEO of the Mortgage Bankers Association, said in a statement.

“Given the healthy financial position of the FHA, MBA continues to believe that HUD should make FHA loans more affordable by reducing mortgage insurance premiums as soon as fiscal opportunities permit,” Broeksmit said. “This move would help offset the impact of rising mortgage rates and improve the purchasing power of many potential first-time home buyers, minority buyers, and low-to-moderate income earners.”

Budget considerations are important because the FHA is considered “negative credit subsidy,” meaning it returns money to the government, Gordon said.

For term mortgages alone, the capital ratio was 10.47%, down from 7.99% in 2021. Its conversion mortgage-to-equity ratio was 22.77%, a jump from 6.08% the previous year. Just two years ago, the HECM ratio was underwater at -0.78% and this was a vast recovery from -18.83% in 2018 and -09.22% in 2019 .

The improvement in the HECM ratio was outsized due to the massive increase in home price appreciation over the past two years, said Mia Pittman, deputy undersecretary for risk management.

“Long-term HPA estimates are the primary driver of HECM portfolio valuation, meaning even minor changes in projected HPA can have an outsized impact on the future estimated value of the portfolio,” Pittman continued. “With the HPA capping and other economic changes, the FHA does not expect the HECM portfolio to maintain the same level of financial performance in future years.”

As of September 30, the FHA had $1.2 billion of insurance in force. For comparison, the six active private mortgage insurers had an IIF of about $1.5 billion on the same day, according to Keefe, Bruyette & Woods.

A stress test modeling the macroeconomic conditions encountered in 2007 on its current portfolio would reduce its capital base by 5 percentage points, leaving the FHA with a capital ratio of more than 6%, more than triple its term in Congress, a said Pittman.

“Importantly, the overall performance of the fund can also be represented by its capital of $141.7 billion, an increase of $41.2 billion from the prior year,” she said. note.

Currently, the agency has fewer seriously delinquent loans in its inventory, with the FHA reporting a rate of 4.77% as of September 30. This is down from a high of 11.9% in November 2019 and 8.81% at year-end. the year 2021, a feat Gordon attributed to loss-mitigation programs developed as the pandemic began to subside.

It is working on new tools to help the roughly 350,000 borrowers who remain seriously delinquent, in the face of a “housing market which has changed very significantly in recent months, particularly with regard to interest rates“, said said Gordon. “So the success of all of these efforts, I think, demonstrates that HUD is very well positioned from a financial standpoint to handle the economic headwinds that will arise over the next year.”

But at the same time, FHA requests and rate freezes have increased in recent months as mortgage rates have risen and the US economy has slowed. Data released by Black Knight for October found the FHA share of rate locks to 17%, up more than 6% from the previous year.

That growth is not concerning because the program is the backstop of the mortgage market, Gordon noted.

“The FHA has played this countercyclical role before and one thing that’s important about what we do unlike almost anyone else, we don’t run our program looking for a specific market share,” he said. said Gordon. “Our goal is to provide access to mortgage credit to people or at times when mortgage credit is not available to people elsewhere.”

As credit tightens in other segments, the FHA welcomes borrowers entering the program.

“We just don’t think of it as a good or a bad thing,” Gordon continued. “What we think is our mission, and we are here to do our mission.”

The strength of the MMIF means the FHA is well positioned to provide access to credit as needed in the current business cycle, she said.

Sallie R. Loera