FHA's 2013 Actuarial Study: Another year of rosy scenarios

Article Highlights

  • For the fifth year in a row the FHA has been in violation of federal law by failing to meet its minimum capital standard of 2 percent.

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  • Using the AEI Mortgage Risk Index, FHA’s home purchase loans are almost exclusively high risk.

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  • Bottom line–if the economy catches a cold, the FHA gets pneumonia.

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For the fifth year in a row the FHA has been in violation of federal law by failing to meet its minimum capital standard of 2 percent—equal to about $22 billion on its $1.1 trillion book of insurance in force.  The 2013 Actuarial Study found that the FHA had an economic net worth of -$8 billion, up from -$13.5 billion last year, but still $30 billion short of the 2 percent statutory standard.  This projection assumes moderate house price appreciation averaging 3-3½ percent over the next 28 years and that a recession is unlikely over the next few years.  Under this rosy scenario, it is no surprise that each new book of business FHA adds looks profitable.  It is also no surprise that FHA has had to revise the expected cumulative claim rates for the 2009-2012 vintages substantially upward from last year’s estimates (for example 2009 was raised from 13.25 percent to 15.44 percent).

Using the AEI Mortgage Risk Index, FHA’s home purchase loans are almost exclusively high risk (87 percent) with 13 percent being medium risk, and 0.3 percent being low risk. From 1935-1955 nearly 100 percent of FHA’s loans would have qualified as low risk.  The preponderance of high risk loans today helps explain why FHA’s delinquency rate remains stubbornly high at 15 percent and its private GAAP net worth has only improved modestly from -$27 billion in September 2012 to -$25 billion this month. These are not indicia of a financial institution on the road to recovery.

Consider that the current economic expansion is 54 months old, about on par with the World War II standard of 58 months. Given that the standard deviation of postwar expansions is 33.4 months, a recession sometime in the next couple of years is likely.  At the same time unemployment is at an unusually high 7 percent this far along in an expansion.  Since the unemployment rate generally rises by about two percentage points in a recession, a rate of 8½-9 percent might be expected.

The threat posed by FHA is demonstrated by the alternate scenarios contained in the actuarial study.  For example, FHA has a -$23 billion economic value today under the 10th worst path, one that likely equates to the impact of a near-term recession.  This $15 billion decline in value compared to the baseline case is nearly enough to wipe out FHA’s minimum statutory capital requirement of 2% or $22 billion.

Bottom line–if the economy catches a cold, the FHA gets pneumonia. It is time Congress and the FHA faced facts–FHA poses great risks to the taxpayer and places most of its insured homebuyers into high risk loans.

Edward J. Pinto is a Codirector of AEI’s International Center on Housing Risk.

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About the Author

 

Edward J.
Pinto
  • American Enterprise Institute (AEI) resident fellow Edward J. Pinto is the codirector of AEI’s International Center on Housing Risk. He is currently researching policy options for rebuilding the US housing finance sector and specializes in the effect of government housing policies on mortgages, foreclosures, and on the availability of affordable housing for working-class families. Pinto writes AEI’s monthly Housing Risk Watch, which has replaced AEI’s FHA Watch. Along with AEI resident scholar Stephen Oliner, Pinto is the creator and developer of the AEI Pinto-Oliner Mortgage Risk, Collateral Risk, and Capital Adequacy Indexes.


    An executive vice president and chief credit officer for Fannie Mae until the late 1980s, Pinto has done groundbreaking research on the role of federal housing policy in the 2008 mortgage and financial crisis. Pinto’s work on the Government Mortgage Complex includes seminal research papers submitted to the Financial Crisis Inquiry Commission: “Government Housing Policies in the Lead-up to the Financial Crisis” and “Triggers of the Financial Crisis.” In December 2012, he completed a study of 2.4 million Federal Housing Administration (FHA)–insured loans and found that FHA policies have resulted in a high proportion of working-class families losing their homes.

    Pinto has a J.D. from Indiana University Maurer School of Law and a B.A. from the University of Illinois at Urbana-Champaign.

  • Phone: 240-423-2848
    Email: edward.pinto@aei.org
  • Assistant Info

    Name: Emily Rapp
    Phone: 202-419-5212
    Email: emily.rapp@aei.org

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