FHA Reports Higher Capital Ratio for 2019
Written By: Joel Palmer, Op-Ed Writer
The Federal Housing Administration (FHA) reported that the capital ratio for its Mutual Mortgage Insurance (MMI) Fund reached its highest level in 12 years.
The agency’s 2019 Annual Report to Congress also noted that insured mortgages with extreme risk layering is increasing.
The MMI Fund supports FHA’s single-family mortgage insurance programs, including all forward mortgage purchase and refinance transactions. It also supports mortgages insured under the Home Equity Conversion Mortgage (HECM), or reverse mortgage program.
The fund’s capital ratio for the latest fiscal year was 4.84 percent, a significant jump from the 2.76 percent ratio the year before. The capital ratio is one indicator of the fund’s financial health and includes both FHA-insured single family forward and reverse mortgage portfolios.
This marked the fifth consecutive year the ratio exceeded 2 percent, the mandatory minimum established by Congress. MMI Capital increased by $27.5 billion, benefiting from seven years of strong house price appreciation and by more favorable economic projections than assumed in the fiscal 2018 report.
The report wasn’t all positive, with evidence that risk layering in FHA mortgages is on the rise.
For the sixth straight year, the average borrower debt-to-income ratios increased and nearly 27 percent of FHA-insured mortgages had DTIs exceeding 50 percent in 2019.
The volume of mortgages with credit scores less than 620 has doubled over the last three years. And in the last six years, the share of borrowers with sub 620 scores has grown from 1.88 percent to 11.21 percent.
Nearly 40 percent of purchase mortgages required some form of downpayment assistance. That is up from 29.5 percent in 2011.
“While each risk attribute taken by itself can be managed through other compensating factors, mortgages with more than one of these risk factors, which is referred to as risk layering, typically default at higher rates. The incidence of extreme risk layering is on the rise,” stated the report.
Added Brian D. Montgomery, federal housing commissioner for HUD: “Looking forward, we must focus on seeking the right balance between facilitating access to mortgage credit and managing risk. Our mission is to make certain FHA remains a stable and reliable resource to provide housing finance support for first-time homebuyers, and other underserved borrowers.”
Additional information included in the report includes:
The value of the insurance in-force on FHA single-family mortgages was nearly $1.3 trillion at the end of the fiscal year.
The performance of the forward book of business posted a stand-alone capital ratio of 5.44 percent. The MMI Capital of the forward book of business also improved year-to-year by over 42 percent with a value of over $66.6 billion.
The HECM portfolio continues to show a negative stand-alone capital ratio, but improved substantially from -18.83 percent in 2018 to -9.22 percent in 2019. The HECM portfolio also showed an improvement in MMI Capital, increasing $7.7 billion.
FHA-insured mortgages comprised 11.41 percent of all single-family residential mortgage originations (by dollar volume). This was a decrease from 12.28 percent in 2018 and down from the 17.90 percent post-crisis period peak in 2009.
Purchase mortgages represented 75 percent of FHA’s 2019 endorsements. The share of FHA-insured purchase transaction mortgages for first-time homebuyers was nearly 83 percent.
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.
