Written By: Joel Palmer, Op-Ed Writer
The Federal Housing Administration’s (FHA) Mutual Mortgage Insurance (MMI) Fund remains relatively sound but continues to be dragged down by its reverse mortgage portfolio.
Last week, FHA released its 2018 Annual Report to Congress on the economic condition of the MMI Fund.
The report said the fund’s overall economic net worth for the current fiscal year is $34.86 billion. That’s an increase of over $8 billion from FY 2017.
The fund’s capital ratio is 2.76 percent, up from 2.18 percent the previous fiscal year. This is the fourth consecutive year the ratio exceeded the statutory minimum of 2 percent.
“The financial health of FHA’s single-family insurance fund is sound,” said U.S. Housing and Urban Development Secretary Ben Carson.
Despite the overall fiscal health, FHA said in a call that the agency will not reduce mortgage insurance premiums.
“As we look to the future, FHA must continue to seek the right balance between facilitating access to mortgage credit and managing risk,” said FHA Commissioner Brian Montgomery.
The MMI fund would have performed even better were it not for the negative impact of FHA’s Home Equity Conversion Mortgage (HECM), or reverse mortgage program.
Excluding HECMs, FHA’s forward mortgages have a capital ratio of 3.93 percent and a positive economic net worth of $46.8 billion. By contrast, the 2018 HECM portfolio has a negative capital ratio of 18.83 percent and a negative economic net worth of $13.63 billion.
The annual report showed that HECM endorsements declined 12.6 percent since last year, with 48,327 new mortgages endorsed. Total capital resources in the HECM portfolio totaled $2.11 billion for FY 2018, which was offset by a negative $15.75 billion in cash flow net present value.
FHA hopes recent actions on HECMs will reduce the volatility of the portfolio. In 2017, FHA implemented changes to mortgage insurance premiums and Principal Limit Factors (PLFs). A few months ago, the agency announced that servicers may have to provide a second property appraisal in certain scenarios.
“The impact of these changes on new HECM endorsements, and the ongoing performance of the outstanding HECM portfolio, will continue to be closely monitored and managed by FHA,” said an agency statement.
“Overall, it is clear that taxpayers are continuing to benefit from an FHA that is committed to its core mission,” said National Association of Relators President John Smaby. “While the Home Equity Conversion Mortgage program, which again had a negative ratio, continues to bring down the overall health of the Fund, NAR is hopeful that recent actions by the FHA to reduce the volatility of the HECM portfolio will continue to stabilize the program.”
Additional highlights from the annual report include:
•FHA’s cumulative insurance-in-force (IIF) reached $1.26 trillion of unpaid principal balance (UPB), largely unchanged from FY 2017.
•FHA endorsed more than 1 million forward mortgages in FY 2018, totaling $209 billion in UPB.
•First-time homebuyers accounted for 641,921, or 82.7 percent, of all FHA forward purchase loans.
•Minority homebuyers accounted for 33.8 percent of all FHA forward purchase loans.
•The average loan amount of FHA-insured forward mortgages was $206,041.
•The average borrower's credit score was 670 compared to 676 in FY 2017.
FHA said in the report that it will continue to monitor credits risks, including the drop in the average borrower’s credit score. Those risks include:
•An increase in the share of cash-out refinances.
•An increase in borrowers’ debt-to-income ratios.
•An increase in the share of purchase mortgages requiring downpayment assistance.
•A decrease in the share of FHA mortgages endorsed by depository institutions. The share decreased from 43.58 percent in 2010 to 14.09 percent in FY 2017 to 13.35 in FY 2018. “The continuing decrease in depository institution participation in the program could have a significant impact on FHA’s business,” said the report.
The report was met with mostly positive reaction across the industry.
Said Robert D. Broeksmit, CMB, President and CEO of the Mortgage Bankers Association (MBA): ”The continued growth of the Capital Reserve Ratio is welcome news, and indicates that FHA is effectively serving its core mission in the single-family market - providing safe and affordable credit to qualified first time and low-and moderate-income borrowers - while appropriately managing its risk and protecting taxpayers.
Lindsey Johnson, President of US Mortgage Insurers, said the FHA’s “oversized role and weak financial condition” remain a concern, adding, “The FHA must continue to refocus on its core mission and scale back its expanded footprint that grew significantly during the great recession.”
About the Author
As an NAMP® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.