FHA Mutual Mortgage Insurance Fund ‘Sound’ for 4th Straight Year, but HECM Problems Persist

For the fourth consecutive year, an independent actuarial report showed the FHA Mutual Mortgage Insurance Fund met its congressionally mandated capital reserve levels in 2018. But HUD Secretary Ben Carson conceded the FHA Home Equity Conversion Mortgage program “continues to be a significant drain on the Insurance Fund.”

Mortgage Bankers Association President and CEO Robert Broeksmit, CMB, called the improvement in capital reserve levels “welcome news” but said the HECM issue “remains a topic of concern.”

The FHA 2018 Annual Report to Congress (https://www.hud.gov/sites/dfiles/Housing/documents/2018fhaannualreportMMIFund.pdf) found the MMI Fund’s FY 2018 Capital Ratio rose to 2.76 percent, an 0.58 percentage point increase over the restated FY 2017 Capital Ratio of 2.18 percent, marking the fourth consecutive year this ratio exceeded the statutory congressionally mandated minimum of 2.00 percent.

Additionally, FHA Commissioner Brian Montgomery said the agency has no plans at this time to cut mortgage insurance premiums, despite the increased capital ratio margin.

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 HECM program.

Other report highlights:
–The MMI Fund’s overall economic net worth for FY 2018 is $34.86 billion, an increase of more than $8 billion from FY 2017. FHA reported economic net worth as Total Capital Resources of $49.24 billion and a negative Cash Flow of -$14.38 billion.

–FHA’s cumulative Insurance-in-Force reached $1.26 trillion of Unpaid Principal Balance at the end of FY 2018, largely unchanged from FY 2017.

–FHA endorsed more than one million forward mortgages in FY 2018 (including 776,284 purchase loans) 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.

–The 2018 HECM portfolio has a negative capital ratio of 18.83 percent and a negative economic net worth of $13.63 billion. 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.

“The financial health of FHA’s single-family insurance fund is sound,” Carson said during a news conference. “FHA is in good hands, guarding against excessive risks, protecting the American taxpayer and remaining true to our core mission to facilitate safe and affordable mortgage options for qualified borrowers.”

FHA Commissioner Brian Montgomery noted the increase in the capital ratio represented a positive trend. “We do have to be realistic, however, that it’s a relatively thin margin,” he said. “As we look to the future, FHA must continue to seek the right balance between facilitating access to mortgage credit and managing risk. Our number one mission is to make certain FHA remains a stable and reliable resource for first-time and minority homebuyers and other underserved borrowers.”

In addition to the HECM program, the report identified several other areas of concern, which it called “latent credit risks:”

–Cash-out refinances continue to be a large and growing segment of FHA new refinance endorsements, increasing from 141,885 mortgages in FY 2017 to 150,883 in FY 2018, and comprised 14.87 percent of total forward-endorsed mortgages in FY 2018.

–The average borrower Debt-to-Income ratio continued to increase for the sixth straight year and was 43.09 percent for FY 2018. The share of FHA-insured mortgages with DTIs exceeding 50 percent increased again, and rose more than four full percentage points–from 20.30 percent of total purchase mortgage endorsements in FY 2017 to 24.80 percent in FY 2018.

–Average borrower credit scores continued to decline in FY 2018 to 670, from 676 in FY 2017. Decreases occurred for purchase endorsements as well as for conventional-to-FHA and FHA-to-FHA refinances.

–The share of purchase mortgages with some form of downpayment assistance increased to 38.79 percent in FY 2018, with 11.39 percent of these mortgages having downpayment funds provided by self-identified governmental entities.

–Mortgages with DPA generally exhibit higher rates of delinquency and default, and those with such assistance financed by self-identified governmental entities have higher rates of default than those with other forms of DPA.

–The share of FHA mortgages endorsed by depository institutions decreased again in FY 2018 to 13.35 percent, down from 14.09 percent in FY 2017 and significantly below the 43.58 percent reached in 2010.

“We will continue to examine the performance of the reverse mortgage portfolio, which is being subsidized by our forward market,” Montgomery said. “We are committed to maintaining a viable HECM program, but we cannot continue to see the HECM book used the way it is.”

A lot of the problems with the HECM program are “water under the bridge,” Carson said. “We have made substantial changes to the programs that we believe are coming to fruition.”

In 2017, FHA implemented a set of changes to mortgage insurance premiums and Principal Limit Factors and followed in FY 2018 with changes to appraisal requirements. “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,” the report said.

In a statement (https://www.mba.org/2018-press-releases/november/mbas-broeksmit-comments-on-fhas-annual-report-to-congress), Broeksmit said the continued growth of the Capital Reserve Ratio is “welcome news” and indicates FHA is effectively serving its core mission in the single-family market.

“The increase in the MMIF capital ratio to 2.76% in fiscal year 2018 moves the program farther above the 2% statutory minimum,” Broeksmit said. “Importantly, the forward book of business continues to perform well, with significant improvements in key indicators such as serious delinquencies, early payment defaults, claims payments and loss rates.”

Broeskmit said MBA is glad to see FHA is closely monitoring increasing risk in the forward portfolio. “While current FHA delinquencies are quite low, it is prudent to keep an eye on these trends to ensure the program does not face undue challenges if, and when, the economy and job market cool,” he said.

Broeksmit noted the drain on the fund presented by the HECM program continues a trend that MBA has highlighted previously and remains a topic of concern. “Reverse mortgages are an important financial tool that, if used properly, can allow the growing number of retirees to age in place,” he said. “MBA applauds the recent steps FHA has taken to stabilize and improve the HECM program, and policymakers should continue considering ways to insulate the forward program from the volatility in the reverse program.”