HUD/FHA is Not More Capable or Noble Than Their Private Sector Counterparts
“I contend that past and current leadership of HUD, as evidenced by their management of FHA’s now $1.1 trillion mortgage insurance program, is not more capable or noble than their private-sector counterparts. They just have the financial backing of the United States Treasury, which prevents them from failing as a result of their mistakes and/or economic crises. And they have a government-granted, mortgage insurance monopoly that allows them to be “self-sustaining” over the long run, as they can recapitalize themselves by overcharging, relative to their risk, future American borrowers for mortgage insurance.” Michael Perry
“This idea that markets tend to fall into self-perpetuating crises and only wise government can extract the country out of this crisis implicitly assumes that you have two kinds of people. Normal people who are operating in the markets and better people who work for the state. They deny human nature.” “The Man Who Saved Poland”, Leszek Balcerowicz, former Polish Central Bank Governor, WSJ, December 15, 2012
“The great achievements of civilization have not come from government bureaus…Do they (American Presidents) choose their appointees on the basis of the virtue of the people appointed or on the basis of their political clout? Is it really true that political self-interest is nobler somehow than economic self-interest?” Presidential Medal of Freedom Recipient and Nobel Economist, Milton Friedman speaking with Phil Donahue, 1979
FHA’s Single Family MMI Fund:
It is correct that FHA didn’t reduce its lending standards, like many private mortgage lenders, pre-crisis. However, FHA’s home lending standards have always been some of the most aggressive and risky in the industry. FHA’s historical credit losses and the current and historical (1990-1991) insolvency of FHA’s Mutual Mortgage Insurance (MMI) Fund attest to this view. In fact, I am not sure that FHA’s single family mortgage insurance program “works” (as a self-sustaining fund), without both home price appreciation and a relatively normal job market.
The November 16, 2012, “Annual Report to Congress, FY2012 Financial Status, FHA MMI Fund” (“FY2012 Financial Status Report”), page 44, Exhibit IV-10 (forward mortgages only), now reveals, in hindsight, how mistaken FHA has been over the years in their attempts to control and price the credit risk of their core, single-family mortgage insurance program. It’s a bar-chart graph, so I had to “eyeball”-estimate the figures.
(Note: “Vintage” is a key term used in assessing credit and insurance risk. It means a particular year, just like with wines. The actuarial estimate for a vintage’s credit losses is for the entire life of the vintage. For FHA’s MMI Fund, the life of every vintage always means 30 years, because FHA offers 30-year, fully-amortizing mortgages and some will stay outstanding for that entire period. The older, often referred to as “seasoned”, the vintage, the more actual historical delinquency and credit loss data available. As a result, actuarial estimates for seasoned vintages will generally be much more reliable than for brand new or recent vintages. The vintage credit loss estimates discussed below, are the most current, from the FY2012 actuarial report, for forward mortgage loans only. HECMs/reverse mortgages are a minor part of the MMI Fund. I could not find historical “by vintage” HECM data.)
From FY1992 to FY1999, vintage credit loss estimates range from 2.50% to just under 4% (around 3% average for each vintage). And it looks like the MMI Fund made a little over 4% in Mortgage Insurance Premium (MIP) revenue for each of these vintages. In my opinion, that’s just about right. The MMI Fund needs to make a little “profit” each vintage to stay above its 2% minimum capital requirement. If the Fund loses a lot (credit losses well exceed MIP revenues), in one or multiple vintages, the solvency of FHA’s MMI Fund is in jeopardy. If the Fund makes too much (MIP revenues well exceed credit losses), FHA is overcharging low-to-moderate income borrowers and first-time homebuyers for mortgage insurance, harming these Americans, and the U.S. housing market and economy.
For vintages FY2000 to FY2003, credit loss estimates moved up to about 4% to 5% and the MMI Fund’s MIP revenue declined to about 3.5%. That’s not sustainable; over time it would cause the MMI Fund to become insolvent. In the FY2004 vintage, credit loss estimates rose to about 7%. In the FY2005 vintage, they exploded to about 11.25%. In the FY2006 vintage, they exploded again to 15.25%. In the FY2007 vintage, they peaked at a whopping 18.25%! And in the FY2008 vintage, they declined to 14%. During the FY2004 to FY2008 time period, the FHA MMI Fund collected about 4% per vintage in MIP revenue. This is how FHA’s MMI Fund became insolvent. In the FY2009 vintage, credit loss estimates were down to about 7.25%, but MIP revenues were just 4.5%; meaning FHA was continuing to worsen its insolvent status (at the same time it was imprudently allowing its share of the U.S. mortgage market to rise to a record level). The FY2010 vintage has a credit loss estimate of about 4% and MIP revenue of about 5% (about the right mix, as I stated above).
I believe it would have been (and still would be) right and politically courageous for HUD, for the first time in FHA’s 78-year history, to seek funds from the U.S. Treasury to recapitalize FHA’s MMI Fund, and then repay them over a relatively long period of time (probably 7 to 10 years or so). Instead, HUD’s current leadership is trying to recapitalize FHA’s MMI Fund over a very short period of time. In my view, primarily “off-the-backs” of low-to-moderate income American borrowers, including first-time home buyers. FHA itself touts the four MIP increases it made through FY2012, as having bolstered the MMI Fund by $20 billion in just a three year period from FY2010-FY2012.
It doesn’t take either skill or political courage for a government monopoly like FHA to dramatically raise MIPs and recapitalize itself by overcharging Americans for mortgage insurance. Especially at this time and in this marketplace, when these borrowers have few, if any, other options. The current HUD administration has raised the upfront Mortgage Insurance Premium (MIP) on forward mortgages to 1.75%, a 75% increase from pre-crisis levels. And they have raised the annual MIPs on forward mortgages (including a fifth increase of 0.10% effective April 1, 2013) to a range of 1.30% to 1.55%, for a 30-year loan. Compared to pre-crisis levels, these annual MIPs are now 160% to 210% higher. Also, pre-crisis, FHA roughly mirrored the private mortgage industry and appropriately cancelled borrowers’ annual MIPs when the loan reached a 78% LTV and had at least five years of amortization. The present HUD administration eliminated this borrower-friendly policy. Now, for most FHA loans, the annual MIPs must be paid for the life of the loan, or the FHA borrower must incur significant costs to refinance (if they can). I suspect that FHA made this change because they were advised that this would create a “long-tail” of annual MIP revenue cash flows in their actuarial calculations. And this “long tail” would improve (by billions; $2.6 billion in FY2013 alone) the actuarial-determined present economic value (solvency) of the MMI Fund. Think about it this way, if this policy change helps the MMI Fund by billions, it hurts new FHA borrowers by exactly the same amount.
FHA’s actuarial estimates prove my point. The FY2011 vintage’s credit loss estimate is just 2.25% and yet FHA is collecting MIP revenues of over 6%. And it gets even worse for FHA borrowers in FY2012 and FY2013. The FY2012 vintage’s credit loss estimate is only 1.75%, yet FHA is collecting MIP revenues of 7%; four times the expected credit losses! Let me state it this way. In the “Actuarial Review of the FHA MMI Fund, Forward Loans for Fiscal Year 2012” on Page ii, Exhibit ES-1, of the Executive Summary, the actuary estimates that the FY2012 “Volume of New Endorsements” (mortgages insured by FHA in 2012) of $211.7 billion, will generate $11.9 billion in positive economic value (“profit”) to the MMI Fund. That’s a 5.6% profit (over and above vintage credit losses) based on insured volume. Let’s put that in terms of individual FHA borrowers. According to FHA, nearly 1.2 million forward mortgage loans were insured in FY2012. That means that the Fund made a profit of almost $10,000 per FY2012 FHA borrower! And, the independent actuary also discloses in Exhibit ES-1, that they expect new loans insured by FHA in FY2013 to generate a similar $11 billion profit, on about the same insurance volume and number of borrowers as FY2012. That’s excessive in my view. These are profit margins that only a government-granted monopoly could charge and sustain, and that’s why I say HUD is recapitalizing FHA’s MMI Fund “off-the-backs” of its new borrowers.
I also learned recently that the current FHA administration is threatening or suing its lenders utilizing the False Claims Act, a new and disturbing tactic that I believe is being used for two reasons: 1) it fits the present administrations’ incorrect and political view that banks and private mortgage lenders are responsible for this crisis and so “let’s make the bad guys pay”, and 2) it’s another way for them to rapidly recapitalize the MMI Fund without seeking funds from the U.S. Treasury (and with their government-granted monopoly, they can get away with it, just like they can in overcharging new FHA borrowers).
FHA has a right and even a duty to seek reimbursement from its private lenders for losses the MMI Fund incurs, that were a result of contractual violations by the lender; typically fraud or material misrepresentations by the borrower. However, it is rare for the FHA lender to know or be involved in borrower fraud or misrepresentation. Historically, FHA and the lender would negotiate loan repurchase and/or indemnification demands in a commercially reasonable manner. And historically, FHA negotiated in good-faith even though they had the “upper hand”; lenders couldn’t negotiate aggressively because they had to maintain their ability to originate and service FHA loans. It is inappropriate for the current FHA administration to betray this historical practice and use the False Claims Act to seek treble damages and threaten criminal penalties, in order to coerce large settlements from lenders. The Supreme Court has rightly limited the False Claims Act’s application. For HUD to be successful in this type of claim, as I understand it, they must prove to a Court of Law that the lender had “knowledge of” and “intent to” defraud (which as I noted above, would be rare). FHA doesn’t seem to care about their historical practices or even about the facts and the law; right now, they only seem to care about using any means possible to recapitalize their insolvent MMI Fund. They know that lenders can’t really challenge them in Court, because of the cost, delay, and uncertainty involved. I would guess it’s even possible that FHA might suspend or terminate an FHA-approved lender, if they exercised their full legal rights and refused to settle promptly? As a result, FHA is using their government-granted monopoly and power and this Act to force lenders into large, quick settlements. Unfortunately, this short-run tactic will have a significant long-term negative effect on the availability and pricing of FHA credit to individual Americans. (I also recently learned that the SBA has adopted a similar tactic
with its lenders. Again, this will have a significant long-term negative effect on the availability and pricing of SBA credit, a program that is vital to the still struggling small business sector.)
I wonder what other questionable tactics HUD is using to bolster FHA’s MMI Fund in the short run. Delaying or preventing legitimate claims from being filed? Denying legitimate claims? As I stated above, HUD should take the politically courageous step of seeking temporary funds from the U.S. Treasury to recapitalize the MMI Fund and pay them back over a longer period of time. This would act to reduce the excessive and unfair economic burden that current FHA borrowers and lenders are being forced by HUD to bear.
The Independent Actuary and FHA’s MMI Fund
Hindsight is a wonderful thing. I’m kidding! It can be, but it can also be incredibly unfair when looking back to judge decisions that were made pre-crisis. Virtually no one predicted this crisis coming; not the economic experts at the Federal Reserve, not me, and certainly not HUD, FHA or their independent actuaries. It was an event that had never occurred in my or my parents’ lifetime (and I was in my mid-40’s at the time). It was an event of such magnitude, that statistically speaking it was considered to be “highly improbable”.
“But what’s good for the goose (the private sector) is good for the gander (the government and HUD/FHA).”
With respect to the single family MMI Fund, FHA has a dual and appropriately conflicting mission: 1) It facilitates fair and appropriate home mortgage credit being provided to deserving low-to moderate income Americans and first-time homebuyers, and 2) It must do so in a manner that keeps the MMI Fund “self-sustaining”, not a cost to the U.S. Treasury/taxpayers. It is supposed to accomplish this second, and equally important mission, as noted above, by properly controlling and pricing the credit risk of its mortgage insurance program. FHA, HUD, and its overseers in Congress, rely heavily on the “Annual Financial Status Report” (as of its fiscal year-end, September 30th) to help it meet this second mission. Key decisions about future credit policy and pricing get made each year, after the results of this report are known.
There are two key components of the MMI Fund’s Financial Status: 1) the current net assets of the fund. This is a simple and straightforward traditional audit of assets and liabilities, and 2) the independent actuaries annual reports that estimates the present economic value of the future cash flows of the $1.1 trillion or so of FHA mortgage Insurance in Force, at September 30th of each year. (There are actually two actuarial reports that must be combined. The large one is for forward mortgages. The much smaller one is for HECMs/reverse mortgages.) So, to summarize, the financial status of the fund is determined by adding the actual net assets on hand (a “pretty darn solid” number) to the present economic value estimate of future cash flows of the $1.1 trillion of mortgage insurance in force (a “wild-ass-guess” number). Stated more simply, as of September 30th of each year, a “pretty darn solid” number is added to a “wild-ass-guess” number and the product determines if the MMI Fund is solvent or not. And that product divided by the Unamortized Mortgage Insurance in Force (at Sept. 30th of each year), represents the MMI Fund’s economic capital ratio (by law, it is required to be at least 2%).
According to the FY2012 Financial Status Report (as of September 30, 2012), the “pretty darn solid” number was a positive $30.3 billion and the “wild-ass-guess” number was a negative -$46.6 billion, so that the MMI Fund had a negative Present Economic Net Worth of -$16.3 billion and a negative Capital Ratio of -1.44%. In other words, the FHA MMI Fund was estimated to be insolvent as of September 30, 2012.
You will see from the analysis below that the FHA MMI Fund’s independent actuaries were no better at predicting the future than the National Statistical Rating Agencies (who are being sued by the government and others for their pre-crisis work). In fact, FHA’s actuaries performance was worse than the credit rating agencies once the crisis became known. In my review back to FY2006 (the last year before the crisis began) and through FY2012, the actuaries assumed that every single future vintage of mortgage insurance (projecting out 6 to 7 years in the future) would produce a positive economic result for the fund. Unbelievably, even when the actuaries had calculated that the current mortgage insurance year (just completed) had produced an economic loss to the fund, they always assumed that the next year’s vintage would immediately turnaround and produce a positive economic value and that each successive future vintage also would produce positive economic results for the fund. Even after the crisis became well known!
In the FY2006 Financial Status Report (before the crisis started), the actuaries estimated the present economic value of the FHA MMI fund, as of September 30, 2006, to be $22 billion and the capital ratio to be a record high of 6.82%. And they projected that each and every future vintage for the next seven years would contribute positively to the fund; and add a total of $5 billion in future economic value to the fund by FY2013. As a result, the FY2006 actuaries predicted that the MMI Fund would have a positive present economic value of $33.8 billion and capital ratio of 6.82% (coincidentally), as of FY2012. We know now, with
the benefit of hindsight, that the actual FY2012 Financial Status Report estimates a negative present economic value of -$16.3 billion and a negative capital ratio of -1.44%. The FY2006 actuaries were “only” too high on their FY2012 estimate by $50 billion in economic value and 8.26% on the capital ratio!
Now, let’s take a look at the FY2008 Financial Status Report, as of September 30, 2008 (well into the housing/mortgage crisis and right at the peak of the financial crisis. IndyMac Bank had been seized by the FDIC on July 11, 2008): As a result of the crisis, the actuaries estimated that the present economic value of FHA’s MMI Fund had declined substantially during the year to $12.9 billion and the capital ratio had fallen by more than half to 3%. Unbelievably, while the actuary calculated that the FY2008 new book of mortgage insurance had cost (generated a loss) the fund -$3.6 billion in negative present economic value, they projected that the FY2009 new book of mortgage insurance would immediately turn around to a $2.4 billion economic profit and that each and every vintage, through FY2015, would contribute positively to the fund. In total, the actuaries estimated that the FY2009-FY2015 books would produce positive economic value (profit) to the fund of $35.1 billion. (FHA was experiencing an influx of volume by this point, as a result of the collapse of the private MBS markets. So the actuaries calculated that more insurance volume meant more positive economic value being created for the fund). The FY2008 actuaries also predicted that the MMI Fund would have a positive present economic value of $33.8 billion and capital ratio of 2.39%, as of FY2012 (more insured volume though, lowers the capital ratio). We know now, with the benefit of hindsight, that the actual FY2012 Financial Status Report estimates a negative present economic value of -$16.3 billion and a negative capital ratio of -1.44%. The FY2008 actuary was again (coincidentally) off by a whopping $50 billion in economic value and the capital ratio was off by 3.83%.
Even in the FY2010 Financial Status Report (just two years ago and well into the crisis) the actuaries were materially wrong. As of FY2010, September 30, 2010, the present economic value estimate of the FHA MMI Fund was down to $4.7 billion and the capital ratio was just 0.50%. It had been declining every year since FY2006 as a result of the crisis. And yet the FY2010 actuary predicted that by FY2012, the MMI fund would have a substantially improved present economic value of $15.6 billion and an improved capital ratio of 1.24%. However, we know now, with the benefit of hindsight, from the FY2012 Financial Status Report, that the FY2010 actuary was off by a whopping $32 billion (in just two years) and the capital ratio was a negative -1.44%, not a positive 1.24%.
I need only have used the figures in this paragraph to prove to you how bad these actuarial figures were during the crisis, but what fun would that be? The actuaries told HUD/FHA on the first day of each fiscal year, for every year this century, that each new year’s book of (FHA mortgage) insurance business would generate an economic profit to the MMI Fund! In fact on October 1, 2006 (the first day of FY2007), the actuaries told FHA that they expected the FY2007 new book of business to produce a positive economic value to the MMI Fund of $81 million. On October 1, 2007 (the first day of FY2008), the actuaries told FHA that they expected the FY2008 new book of business to produce a positive economic value to the MMI Fund of $390 million. And on October 1, 2008 (the first day of FY2009), they told FHA that they expected the FY2009 new book of business to produce a positive economic value to the MMI Fund of a whopping $2.4 billion! And yet, with the benefit of hindsight, we know now that these three “books of business” created the worst mortgage insurance losses for the FHA MMI Fund in its history. The economic value “created” from the FY2007 to FY2009 new books of business was a negative -$40.6 billion (see FY2012 Financial Status Report, Page 37, Exhibit IV-5), not a positive $2.9 billion as the independent actuaries had predicted and told FHA at the time. (And the positive actuarial figure of $2.9 billion includes HECMs, yet the negative -$40.6 billion current estimate only includes forward mortgages. HECM economic losses during this period would cause the “actuarial miss” to be even a little larger.)
Take a look at these actuarial reports for yourself. They are filled with page after page of analysis, data, and tables. It is clear that these actuaries used respected economic forecasts, complicated statistical formulas and customized software applications to produce their estimates/best predictions of the current and future Financial Status of FHA’s MMI Fund. I think it would be reasonable to assume that a fair number of highly-educated “experts” were involved in creating these estimates/predictions and producing these reports. I would guess that hundreds of (maybe thousands of) hours were billed each year and that these reports and their estimates/predictions cost FHA hundreds of thousands of dollars (or more) every year. And yet, with the benefit of hindsight, we know now, that year after year, the best estimates/predictions in these actuarial reports were horribly wrong. They materially overstated the viability of FHA’s core mortgage insurance program and the solvency of the MMI Fund for years.
Why? Because we now understand, as a result of this unprecedented economic crisis, that sophisticated models like these are built on a very shaky foundation; a foundation filled with assumptions about the future; a future which no one, even “independent experts” really can predict. HUD and FHA’s management (and its overseers in Congress), just like the Federal Reserve (and other government economists and financial regulators), and just like IndyMac Bank and other private-sector financial participants, heavily relied on these types of models and the estimates and predictions they produced, to make many key decisions before the crisis. Without them, key decisions would have been left only to more subjective opinion and judgment
(and that’s not very reliable where large data, many variables, and an uncertain future are involved). Today, as a result of the crisis, some have learned to understand the flaws and limitations inherent in these models, and use their intuition, experience, and good, old-fashioned common sense to more critically review and question “what the models say”.
Final Thoughts on FHA’s Single Family MMI Fund
“I think FHA is putting itself out of business with the moves they’ve made in the past couple of years.” Dennis C. Smith, broker and co-owner of Stratis Financial Corp.
“Although they wouldn’t agree with that assessment, the FHA’s top officials readily admit that their priority is not increasing market share but protecting the agency’s multi-billion-dollar insurance fund reserves and cutting losses.” syndicated columnist, Ken R. Harney
(Los Angeles Times, Kenneth R. Harney, “FHA loans get more expensive”, February 10, 2013)
Early in its tenure, the current HUD administration touted the importance of FHA’s “countercyclical role” during FY2007-to-FY2009 as “saving the housing market and the Country from another depression”.
“In particular, FHA’s role has grown substantially from 3 percent of lending by dollar volume in 2006 to approximately 30 percent of all mortgages originated today. FHA exists to serve Americans homeownership needs, particularly in times of economic crisis…” April 29, 2009 HUD Secretary Donovan
“…I can assure you the Nation’s economic problems would be even worse today, where it not for FHA. Any hope for a housing recovery, and for our economy, would clearly be stalled if it wasn’t for the critical role we play.” November 12, 2009, FHA Commissioner Stevens
I don’t know about that. I would think that many Americans who bought homes with an FHA loan, during this 2007-2009 period before housing prices had bottomed, wished they hadn’t done so. These FHA-assisted home purchases really didn’t help these individuals, as much as they helped home builders, Realtors, Big Banks/FHA mortgage lenders, and other businesses tied to the housing industry. The HUD Secretary himself noted that housing prices were “weaker than expected” even in 2011. Housing prices only really began to recover in 2012 and 2013, because of sustained low rates engineered by the Federal Reserve and mostly private institutional capital buying homes for investment/speculation. In fact, FHA’s market share has declined considerably during the period in which housing prices have recovered.
Also in 2009, the current HUD/FHA administration touted the credit improvements they had made and how they would positively impact the 2009 book of business vs. prior books of business.
“The independent study shows that FHA sustained significant losses from loans made before 2009….” November 12, 2009, HUD Secretary Donovan
“Today, the average FICO score is 693 compared to 633 just two years ago.” November 12, 2009, FHA Commissioner Stevens
And the current HUD administration still tout’s FHA’s countercyclical role in “saving the Country from depression” and yet at the same time, they now say that significant portions of FHA’s lending during FY2007 to FY2009 was not prudent! In fact, they now “financially-disown” these vintages (even FY2009, which they previously touted and which happened mostly on their watch), because they are generating tens of billions in credit losses and are the reason the MMI Fund is insolvent today.
“These measures (to improve the solvency of the MMI Fund) will directly address the source of the problem….losses stemming from the legacy books of business in the 2007-09 period….” November 13, 2012, HUD Secretary Donovan
I think it is illogical and hypocritical for the present HUD administration to continue to tout FHA’s “counter-cyclical” lending role during the crisis, when they have “financially-disowned” these same lending books of business. Don’t you?
And really FHA didn’t do anything proactive, related to their home lending, during the crisis. They stood passively by, as huge mortgage volumes flowed to them after the private mortgage markets collapsed in mid-2007. And they incorrectly assumed that the MMI Fund would stay solvent (and promptly rise back above its 2% capital requirement), because the actuaries told them so.
“The study (actuarial) projects the reserve fund will rise above the mandated 2 percent level on its own in just a few years.” November 12, 2009 FHA Commissioner Stevens
Later though, as the actuaries continually and materially revised their estimates down and it became clear that the huge amount of “countercyclical” FHA lending done in FY2007-to-FY2009 (well before housing prices had bottomed) was driving the FHA MMI Fund towards insolvency, they modified their story. In their reporting and comments, they segregated the FY2007-FY2009 together as “legacy books of business”. And they highlighted all the prudent credit policy changes they have made since then (and their MIP revenue increases) and the positive economic books of business that are estimated (by those same actuaries!!!) to have taken place from FY2010-FY2012. The clear implication being, “We are great. It was past administrations who screwed up.”
Unfortunately, I think this is how our government bureaucracies work. They try to avoid objective measures of accountability. And where they can’t and they have an objective and important goal like solvency, they try to downplay it (by highlighting their conflicting goal of being a “lender-of-last-resort” in a crisis). And when that doesn’t fully work, they blame it on the private sector lenders. And when that doesn’t fully work, rather than take responsibility, they blame it on previous administrations.
Hypocritically, the present HUD administration touts its policy changes but ignores the fact that the prior administration, in 2008, pushed Congress to eliminate THE MOST IMPRUDENT home loan FHA has ever allowed (it had been trying for several years to convince Congress to do so); seller-provided, via “shell” not-for-profit organizations, down payment assistance loans. These loans have cost the MMI Fund $15.25 billion as of FY2012. As FHA itself points out, these very risky FHA loans (which should not have been made) are the difference between the current insolvency and solvency of the forward mortgage portion of the MMI Fund.
And finally, as discussed above, in a politically desperate and ultimately unsuccessful attempt to keep the MMI Fund from becoming insolvent on their watch (and now to rapidly recapitalize it), they have inappropriately decided to massively overcharge new FHA borrowers for mortgage insurance and attack FHA lenders using the False Claims Act. These actions are actually hurting the fragile housing market recovery that is underway and is so important to jobs and our economy. As I said earlier, the right and politically courageous action would have been (and still would be) for HUD to seek temporary funds from the U.S. Treasury for the first time in FHA’s 78-year history. Use these Treasury funds to prudently recapitalize the FHA MMI Fund and agree to pay them back over a relatively long period of time (again, by overcharging future borrowers for mortgage insurance, but at a much lower and more reasonable level per individual borrower).
“Therefore, my immediate priorities are for FHA, first, to preserve the solvency of the MMI Fund and ensure FHA does not require taxpayer assistance.” November 12, 2009, FHA Commissioner Stevens
“While this report (showing FHA’S MMI Fund fell below zero….to a negative 1.44 percent; insolvent as of September 30, 2012) does not mean that FHA will have to draw from the Treasury, we take its findings seriously. That is why today we are announcing a series of changes to strengthen the Fund.” November 13, 2012, HUD Secretary Donovan
This is why I contend that HUD is not more capable or noble than their private-sector counterparts, despite their protestations to the contrary.
A Few Historical Statements by FHA:
“FHA Commissioner announces a set of credit policy changes that will enhance FHA’s risk management function, including the hiring of a Chief Risk Officer for the first time in the agency’s 75-year history.” (September 18, 2009, post-crisis) M. Perry: “Think if this was a private bank that had never had a CRO in its history? Isn’t the horse already out of the barn? I guess better late than never!!!”
“FHA proposes to increase the net worth requirements of FHA-approved lenders….” (November 30, 2009) M. Perry: “Isn’t this more than a bit hypocritical given that the FHA MMI Fund itself couldn’t even meet its 2% minimum capital requirement under the law as of FY2009?”
“FHA delinquencies are 240 percent lower than subprime, even though both featured low down payments.” (October 11, 2011) M. Perry: “IndyMac was not a major subprime lender. We were a major Alt-a lender, which historically performed much better than FHA loans. It is ignorant and not appropriate to compare total portfolio delinquencies for FHA and subprime. FHA’s portfolio had grown dramatically and subprime had shrunk significantly by 2011. Rapid new loan volume causes overall
portfolio delinquencies to decline for a time and masks delinquency and credit problems by vintage. See Statement 34 posted on my blog for a greater discussion of this issue. FHA’s credit losses during the bubble vintages are very high.”
Brief Facts about FHA’s Mutual Mortgage Insurance (MMI) Fund:
- The Cranston-Gonzalez National Affordable Housing Act (NAHA) mandates that FHA’s MMI Fund maintain a (minimum) capital ratio of 2 percent of Unamortized Insurance in Force (IIF). The FHA MMI Fund has been in violation of the NAHA law since FY2009 (September 30, 2009).
- The FHA MMI Fund had a peak capital ratio of 6.82% at FY2006. As a result of the housing bubble and bust and the economic crisis (and mistakes by FHA), it has declined every year since. It was a NEGATIVE 1.44% at September 30, 2012 (FY2012).
- As of September 30, 2012, the FHA MMI Fund was insolvent with a present negative economic value of -$16.3 billion (-$13.5 billion negative present economic value for forward mortgages and -$2.8 billion negative present economic value for HECMs/reverse mortgages).
- As of September 30, 2012, the FHA MMI Fund had Insurance in Force of $1.1 trillion. To reach the 2% minimum capital ratio mandated by the NAHA law, the MMI Fund would have needed $38.9 billion of additional capital from the U.S. Treasury/taxpayers.
- With the benefit of hindsight (using current actuarial projections by vintage/year from the FY2012 Financial Status Report), it appears that the FHA MMI Fund has been insolvent since at least September 30, 2009 (FY2009).
- Had the FHA MMI Fund been shut down at the end of FY2009 (if it had been a private sector mortgage insurer, it likely would have been prohibited from insuring mortgages when it violated its legally mandated minimum capital requirement of 2% at September 30, 2009, and it might have been declared insolvent on a “mark- to-market” basis and forced into bankruptcy by its creditors), it would have cost taxpayers at least $60.1 billion (the negative economic value of the 1992-2009 endorsement vintages on forward mortgages, see FY2012 Financial Status Report, Page 37, Exhibit IV-5).
- Every new book of business ($1.32 trillion of FHA mortgage insurance) from FY2000 to FY2009 was an economic loser for the MMI Fund, because of the crisis and FHA’s own mistakes. From FY1992-FY2006, FHA insured $1.2 trillion of forward mortgages and created a negative present economic value of -$19.5 billion for the MMI Fund. From FY2007-FY2009, FHA insured $564 billion of forward mortgages and created a negative present economic value of -$40.6 billion for the MMI Fund. From FY2010-FY2012, FHA insured $721 billion of forward mortgages and primarily as a result of four significant increases in the Mortgage Insurance Premiums (MIP), created a positive present economic value of $22.7 billion for the MMI Fund.
- These figures don’t include HECMs, which are also part of the FHA MMI Fund. I could not find tables by historical vintage in the FY2012 Financial Status Report or the HECM actuarial report as of FY2012. I would note, because of the crisis, every single vintage ever produced of HECMs has to be an “economic loser” for the FHA MMI Fund. As of FY2012, FHA had $78.2 billion in HECM Insurance in Force and the HECM portion of the MMI Fund had a negative present economic value of -$2.8 billion. The HECM portion of the FHA MMI Fund on a stand-alone basis is insolvent. And FHA’s FY2012 HECM actuarial report is projecting that the HECM portion of the MMI Fund will still be insolvent, with a negative economic value of -$426 million, in FY2019.