Five Takeaways from the FHA’s Latest Actuarial Report

Last week the Federal Housing Administration released its 2013 actuarial report, which projects the health of the agency’s mortgage insurance fund over the next three decades. The report comes less than three months after the FHA requested taxpayer assistance for the first time in its 79-year history, fulfilling a requirement under the arcane budgeting rules governing all federal insurance programs.

While parsing through the numbers—and the report has a lot of them—it’s important to keep them in context. During the most recent housing crash, the FHA stayed open for business while private sources of capital largely retreated from the mortgage market. Without the agency’s help, it would have been much more difficult for middle-class families and rental housing developers to access mortgage credit since the housing crisis began. According to Moody’s Analytics, in 2011 alone the FHA prevented home prices from dropping an additional 25% and rental construction from plummeting, which would have cost three million jobs and sent our economy into a double-dip recession.

With that recent history in mind, here are five key takeaways from the 2013 actuarial report:

1. The agency still doesn't have enough money to cover all expected claims over the next 30 years, but it has plenty of cash on hand to cover its near-term obligations.

The most closely-watched statistic in the actuarial report is the fund’s “economic value,” which compares the total amount of cash the agency has on hand to the total projected claims over the next 30 years. At this particular point in time, the agency will need an additional $1.3 billion to cover all of those claims, assuming no new business comes in.

That’s not to say the FHA is out of money, though. In fact, the fund has about $30 billion in net capital resources to cover claims as they come in, and the agency is expected to bring in $11.9 billion in revenues in 2014 alone, which is not counted in the actuarial analysis.

2. The agency's worst financial days appear to be behind it.

The FHA has had a rough couple years, but things appear to be getting better. While the projected shortfall is still large, it’s significantly smaller than the $16.3 billion shortfall projected in last year’s report. And according to this year’s report, the agency is expected to meet its required 2% capital reserve by 2015, two years sooner than last year’s estimate.

3. Reforms enacted in recent years appear to be working.

When you look at the projected claims and losses in each book of business, three things are clear. First, the clear majority of losses are coming from loans originated from 2007 to 2009, as the housing bubble was reaching its tipping point and just after it popped. These books are projected to result in a net loss to the fund of $30 billion.

Second, the more recent books of business are very profitable, in part because of protections put in place by the Obama administration. The 2010-2013 books are projected to bolster the agency’s capital reserves by more than $31 billion.

Third, the most recent policy changes put in place to protect the fund appear to be working. The 2013 book of business is expected to be one of the agency’s most profitable ever, adding about $11 billion to the fund over the life of the loans. And it’s the first book to incorporate the latest wave of policy changes at the FHA, including fee hikes and improved disposition strategies for FHA-owned foreclosed properties.

4. The FHA continues to play a critical role in the U.S. housing market and broader economy.

Over the years, the FHA’s dual mission has been to ensure stability in the U.S. mortgage market and promote sustainable homeownership for low-wealth and minority families. As mentioned above, the agency dutifully fulfilled the first mandate in the aftermath of the recent housing crisis. And despite difficult financial times, the FHA continues to help working families, according to the data in the actuarial report. Last year, 79% of FHA-backed home purchase mortgages went to first-time homebuyers, and while the agency insured just 30% of all home purchase loans in 2012, it insured roughly 55% of black and Latino homebuyers.

5. As the agency’s financial status improves, it’s time to return to its mission.

Based on the performance of the most recent books of business, it’s clear that the FHA’s basic model of well-underwritten, long-term, fixed-rate, low-down-payment lending still works. But today the agency is charged with a difficult task: promoting long-term financial health while fulfilling its mission of promoting homeownership for low-wealth families.

By steadily increasing fees and tightening underwriting standards, the FHA has been largely successful in shoring up its capital reserves so far. But it’s unclear how those changes have affected access to mortgage credit for low- and moderate-income families. For example, the average credit score for an FHA-backed borrower in 2013 was 693, slightly lower than the previous year but still well above the historic average. As the fund continues to improve, the agency will need to take a closer look at this issue and adjust its fees and other policies accordingly.

All things considered, the 2013 actuarial report contains some promising news, which is a welcome change from recent years. But it’s too soon to tell whether the agency is out of the woods, or what impact the report will have on the federal budget. We’ll be keeping a watchful eye on this issue throughout the year, starting with the president’s budget in the late winter.

John Griffith is a senior analyst at Enterprise Community Partners, a nonprofit that advocates for affordable housing.