A Quick Guide to the FHA's MMIF Report to Congress

Introduction

Every year, the U.S. Department of Housing and Urban Development submits a report to the US Congress regarding the health of the FHA's Mutual Mortgage Insurance Fund. The most recent report details the health of the fund as of September 30th, 2022 - the end of the fiscal year for the government.

While you'll no doubt have seen the headlines talking about the capital position of 11.11%, which will quickly be followed by calls the reduce the FHA ongoing mortgage insurance premium that is charged to borrowers, what you generally won't see in the public domain is someone walking through the report, and analyzing the contents.

Normally most people probably wouldn't read through this report, much less analyze it, without it being part of their job. As I'm between opportunities, it certainly isn't part of my job. Still, old habits die hard, and since I currently own my time, and thus my work product, I figure that folks might be interested in reading beyond the headlines and superficial summaries. Full disclosure: this is somewhat slimmed down from what I would normally do, so consider this a taste as opposed to a full meal.

I would suggest you grab your own copy of the report for starters: https://www.hud.gov/sites/dfiles/Housing/documents/2022FHAAnnualRptMMIFund.pdf.

I might gloss over some things you personally might be interested in, but more importantly, having a copy of the report handy means you can take the time to decide whether you agree with my interpretations. One other note: any charts you see will come from that report.

The Forwards

So straight out of the gate, you'll have comments from HUD Secretary Marcia Fudge and Federal Housing Commissioner Julia Gordon . It's worth reading these statements, because you get a sense of their policy priorities, but also because sometimes you'll see a marker placed. For example:

Shifts in the housing market in the second half of fiscal year 2022 are expected to decelerate capital accumulation in the near term. However, the strong state of the MMI Fund will allow FHA to play its important counter-cyclical role in facilitating liquidity and access to mortgage credit for qualified borrowers should other market participants constrict their activity.

Why am I calling this out? For starters, it's important to remember that the inputs that went into this analysis were set earlier this year, and don't even contemplate what happened in late summer with regards to mortgage rates. Secretary Fudge is not only preparing us for what next year's report could contain, but is also making a statement about what to expect from the FHA itself, compared to other market participants. Even if we see the credit box tighten at the GSEs, the FHA intends to lean into its role - and it's why a cut in the MIP isn't their greatest priority. Reducing the MIP has an ongoing impact over the life of a mortgage, and when the priority is on continuing to write business through a downward cycle, an MIP reduction is clearly not something they're going to rush into.

Executive Summary

The Executive Summary kicks off with information regarding COVID forbearance, status of DQ borrowers, and the level of seriously delinquent (SDQ) borrowers. All of these are fairly self explanatory, and reflect the fact that for most of the year, the housing market was quite robust. Next year, some of these charts could look quite different. One thing to keep in mind - the COVID-19 public health emergency is still ongoing, and should we plunge into recession next year, you might see a decent uptick in forbearance numbers.

Next up is Access to Credit.

First-Time Homebuyer (FTH) share for the FHA has hovered in the mid-80s compared with the mid 40s for the "rest of market". That "rest of market" doesn't include bank portfolios or private label securities (PLS), so really one could read that to be referring to conventional mortgages securitized by the GSEs. Before casting judgement, it's important to remember that the GSEs do a lot of low LTV business, mortgages that simply don't make sense to insure with the FHA.

Where we really start to get "apples to apples" is with Exhibit E-5:

What we can see here is that when it comes to the very low downpayment borrower (5% or less) who has a credit score of 680 or less, the FHA is capturing the lion's share. Of course, this should be no surprise. If you consider the Private Mortgage Insurer Eligibility Requirements (PMIERs), the capital requirement for the > 95% LTV loans jumps 35% as soon as you fall below a 680 credit score. That capital impact is going to translate into a premium impact. Add on to that the substantial increase in GSE delivery fees as credit scores fall below 680 for the > 95% LTV product, and the resulting mortgage payment gap grows further.

Still, 25% of this sector of the market isn't zero, and what we're really seeing here is the extent of the affordable products offered by Fannie Mae and Freddie Mac . Obviously though, the MI companies have risk based pricing, and the FHA does not. Therefore, I suspect that if one were to decompose this business split into some sort of risk grading, you would see the conventional markets will have skimmed the cream from this segment of the market. While there are some public policy considerations here, that's a topic for another day - I'm just presenting this as an observation and food for thought.

Exhibit E-6 details their share of lending to different underserved borrower segments. Unfortunately, the chart doesn't really give us enough information to evaluate FHA vs rest of market on its own.

So are these good numbers? Well, I looked at the Urban Institute 's housing finance chart book, and taking Ginnie's share of the combined Ginnie and GSE origination universe, you come in with a share of just over 25%. Basically, FHA is serving twice as many rural borrowers as its share suggests, and around 2.4 times as many Black and Hispanic borrowers as its share suggests. This also implies that the conventional market isn't serving Rural, Black, and Hispanic borrowers to the extent that its market share would imply - and why the Federal Housing Finance Agency is especially interested in the GSEs having equitable housing plans in place. Frankly, I would love to see some in depth analysis to determine whether there is the potential for steering to be taking place, even if it's just only focusing on the monthly payment rather than helping borrowers understand the economics of the different options available to them.

The executive summary concludes with some information regarding the capital position of the MMI fund. I'm going to do a deeper dive on this shortly.

COVID-19 Pandemic, Access to Credit for Underserved Borrowers, and Single Family Borrower Characteristics

What follows is an in-depth discussion of much of what I've covered above. Rather than repeat some of what I just wrote, I'm going to set that aside for you to read on your own. I'm also going to completely skip over the borrower characteristics. Normally this would not be the case - I tend to go through that in great detail - but I'd rather spend my time on a discussion of the FHA capital position since this is a voluntary exercise on my part.

Condition of the Mutual Mortgage Insurance Fund

Finally, we arrive at the headline topic that everyone immediately focused on when the report was released.

So when you see headlines that talk of a capital ratio of 11.11%, what does that mean?

Basically, you take the capital resources on hand, the net present value of the future cash flows, and sum them. That represents the MMI fund's capital. Divide that by the insurance in force (the total balance of the insured loans), and you get the capital ratio.

For those that follow this sort of thing, this is different than how the GSEs are evaluated under the Enterprise Regulatory Capital Framework (ERCF) or the MI companies are evaluated under PMIERs. Both of those regimes focus on the current resources on hand compared to an estimate of stress losses, and do not focus on future cashflow positions.

While there is a discrepancy between the regimes, it should be noted that in the event the FHA's capital ratio falls below zero, they will receive an infusion from the U.S. Department of the Treasury as they did in 2013 - the one and only time that has happened. Therefore, it bizarrely makes sense that you'd have higher standards for the MI companies that don't have access to taxpayer funds, and for the GSEs which only have a finite ability to draw on support from the Federal Government. There is no doubt a discussion to be had about what's the right type of capital regime for all of these entities, and whether being able to tap taxpayer funds should be considered "free" - but that's a discussion for another day.

Overall, capital resources on hand have jumped dramatically in recent history. The credit for this can be laid at the feet of the CARES Act, low interest rates, and a positively booming housing market. At the end of FY2022, the FHA had a smaller book of business than it did in FY2020, and yet capital on hand in 2022 was greater than the total projected capital was in 2020.

Even more impressive is the decline in projected losses. Of course, there's a big caveat: remember that the assumptions used to project those losses are not particularly representative of what 2023 and 2024 are going to look like. So expect those numbers to swing, but there's a lot of breathing room between the current capital ratio and the 2% statutory requirement.

Of course, all of these numbers represent the combination of the HECM (Home Equity Conversion Mortgage or reverse mortgage) and the "Forward" portfolio. Let's see what happens when you split them apart.

If you look at the HECM book, it's been a pretty wild swing from deeply negative to strongly positive when it comes to its contribution to the capital ratio. Back when in I was in the world of private mortgage insurance, where you have to worry about the fact that you're competing with the US government, the prior poor performance of the HECM book kept the capital ratio at a level that was low enough to not justify a decrease in either the upfront or annual premiums charged by the FHA. Because it's a combined fund, the forward mortgage portfolio had to subsidize the reverse portfolio - but no longer.

It's probably important to note here that when you see such a big swing as we have with the HECM book, you should really take the time to understand why it happened. Feel free to let me know what you find out.

One thing I can tell you, courtesy of the report is that home price appreciation (HPA) matters. A lot. Take this chart for example, which shows cumulative home price appreciation since FY2017.

Wow. One thing to remember: the housing market is shifting. Some of these gains may vanish - but it's how homeowners react, and their ability to continue making their mortgage payments, that really matters.

So roughly speaking, reducing HPA by 1% from baseline has a less than 1% negative impact on the capital ratio. What's baseline? Well, those are the Biden Administration's assumptions for home price growth - which predate the sudden surge in mortgage rates.

In other words, the 11.11% wouldn't be 11.11% if the assumptions had been made in September. We'd be looking at a different report. How different? Good question.

Shocking the MMI fund with the economy of Q3 from FY2007 still results in a fairly hefty cushion in the MMI fund. But is this too good to be true?

Not really. We can see the same sort of shock produce an MMI fund that has a negative capital ratio. This passes the smell test.

So as long as they keep premiums constant, both levels and the life of loan aspect, things are likely going to be fine. And it sort of explains why they aren't rushing to cut premiums.

A well capitalized MMI fund means the FHA doesn't become a political liability. Sure, there will be some criticism that they should lower premiums, but I don't see that becoming a lightning rod - especially when many borrowers would be priced out of the market for all premium levels greater than zero thanks to the recent surge in mortgage rates.

Takeaways and Conclusion

So I feel like we should at least have a few bullet points to wrap things up, so here are your talking points:

• The FHA is extremely well capitalized at the present, and while there is uncertainty around what the near to mid term could hold, they should be able to weather any storms on the horizon.
• For first time buyers with a limited downpayment, credit score is going to be a major determinant as to whether they end up in an FHA or a conventional loan.
• The FHA is easily beating the conventional market when it comes to serving Black and Hispanic borrowers. Policymakers have noticed this, and there will be attempts to improve the performance of the conventional market in this regard. How successful they will be is still unknown.

Hopefully you found this informative, and are coming away with a better understanding of HUD's report to Congress.

As I mentioned above, this is a sample of how I approach things. Feel free to reach out if you have a need for in depth analysis regarding a one-off topic, or perhaps even ongoing support.