On Friday, Nov. 16, FHA released their Annual Report to Congress and the Actuarial Review of the 2012 Financial Status of the FHA Mutual Mortgage Insurance Fund. The Review shows that the reserve ratio has fallen to negative 1.44 percent. This reserve is required to be at or above 2 percent. However, FHA is not bankrupt. FHA's current cash reserves total $25.57 billion. However, FHA does not currently have 30 years’ worth of reserves, as is required by statute. The cause for the decline rests in three major areas:
- higher than expected defaults for loan issued in 2007-2009;
- low house price appreciation estimates used in the audit; and
- continued low interest rates (which hurts FHA when borrowers refinance early out of FHA loans, and FHA loses the premium revenue).
FHA believes they will make up much of the loss through the increased premiums instituted last April. However, they will also make two changes to FHA immediately. For new originations, they will eliminate the policy of cancelling the MIP when the balance reaches less than 78 percent. They will also increase the annual premium by 10 basis points (approximately $13/month for the average borrower). They believe these changes will strengthen the Fund and help it recover.
2013 NAR President Gary Thomas issued the following statement on behalf of NAR: “NAR is a strong supporter of FHA and its vital role in the mortgage marketplace. We believe that FHA’s audit is an unfortunate byproduct and reflection of the continuing housing market recovery; however, we are confident that FHA has already taken many of the necessary steps to help stabilize the fund and that rising home prices and continued market improvements will also improve its future financial condition.”