Introduction

The Federal Housing Administration (FHA) was established by the National Housing Act of 1934 and became part of the Department of Housing and Urban Development (HUD) in 1965. It insures private lenders against losses on certain home mortgages.¹ If the borrower does not repay the mortgage and the home goes to foreclosure, FHA pays the lender the remaining amount that the borrower owes (that is, it pays a claim to the lender). FHA charges borrowers fees, called premiums, in exchange for the insurance.

FHA insurance is intended to encourage lenders to offer mortgages to some borrowers who otherwise might be unable to access mortgage credit at affordable interest rates or at all. For example, FHA requires a smaller down payment than many other types of mortgages, potentially making it easier for lower-wealth borrowers, first-time homebuyers, or others for whom a large down payment may present a barrier to homeownership to obtain a mortgage. To qualify for FHA insurance, both the borrower and the mortgage must meet certain criteria.² For example, the principal balance of the mortgage must be under a certain dollar threshold. Lenders that originate FHA-insured mortgages must be approved by FHA.

This report describes certain measures of the financial health of the FHA insurance fund for home mortgages, the Mutual Mortgage Insurance Fund. The discussion in this report assumes a certain degree of familiarity with FHA-insured mortgages. For more information on the basic features of FHA-insured mortgages and FHA's role in the mortgage market, see CRS Report RS20530, FHA-Insured Home Loans: An Overview.

The Mutual Mortgage Insurance Fund

Most single-family mortgages insured by FHA are financed through an insurance fund called the Mutual Mortgage Insurance Fund (MMI Fund).³ Since FY2009, the MMI Fund has included FHA-insured reverse mortgages as well as traditional "forward" home mortgages.⁴ Much of the discussion in this report focuses only on traditional forward mortgages, rather than reverse mortgages. However, certain specified sections discuss both forward and reverse mortgages.

Money flows into the MMI Fund primarily from the mortgage insurance premiums paid by borrowers and from sales of foreclosed properties, and money flows out of the MMI Fund primarily from claims paid to lenders when FHA-insured mortgages default. The MMI Fund is intended to be self-supporting. It is meant to pay for costs related to insured loans (such as insurance claims paid to lenders) with money it earns on those loans (such as through premiums paid by borrowers), not through appropriations.⁵

The MMI Fund is also required to maintain a capital ratio of 2% to help pay for any unexpected increases in losses on its insured mortgages, beyond the losses that it currently anticipates. (Capital in this context is defined as the assets that the MMI Fund currently has on hand, plus the net present value of future cash flows associated with the mortgages that it currently insures. The capital ratio is the ratio of capital to the total dollar amount of mortgages insured under the MMI Fund.) As will be discussed in more detail later in this report, the MMI Fund, like all federal loan and loan guarantee programs subject to the Federal Credit Reform Act of 1990, has permanent and indefinite budget authority to receive funds from the Department of the Treasury to cover increases in the costs of loan guarantees made in prior years.

In the years following the housing and mortgage market turmoil that began around 2007, rising mortgage default rates and falling home prices put pressure on the MMI Fund. This resulted in the capital ratio falling below the required 2% threshold in FY2009 and then turning negative for a period of time. The capital ratio became positive again in FY2014 and regained the 2% threshold in FY2015.

The capital ratio falling below 2%, and then turning negative, raised concerns that the MMI Fund would not have enough money to cover all of its expected future losses on the loans that it was currently insuring. At the end of FY2013, the MMI Fund received $1.7 billion from Treasury using its permanent and indefinite budget authority to ensure that it was holding enough funds to cover expected future losses on insured loans. This represented the first time that the MMI Fund ever needed funds from Treasury for this purpose. The MMI Fund has not needed to draw such funds from Treasury in subsequent years.

FHA faces an inherent tension between facilitating the provision of mortgage credit to underserved borrowers and safeguarding the health of the MMI Fund. Many in Congress have expressed ongoing interest in the affordability, accessibility, and sustainability of FHA-insured mortgages, as well as in the MMI Fund's financial status and its prospects for needing additional funds to pay for future losses on its insured loans. This report focuses on the financial position of the MMI Fund. It begins with a brief overview of some of the major factors that affect the MMI Fund's financial soundness. The remainder of the report focuses on (1) how the MMI Fund is accounted for in the federal budget and (2) the results of annual independent actuarial reviews that are mandated by Congress. The budgetary treatment of FHA-insured mortgages and the actuarial review are two different processes, but both examine how the loans insured under the MMI Fund have performed and are expected to perform in the future and the effects of this loan performance on the financial position of the MMI Fund. The annual actuarial review is the basis for determining the capital ratio. However, it is the annual budget process that would determine if the MMI Fund required assistance from Treasury to ensure that it held sufficient funds to cover increases in anticipated losses on insured loans.

Factors Affecting the Stability of the MMI Fund

This section briefly describes some of the major factors that can affect the MMI Fund's financial position. These factors include default and foreclosure rates on FHA-insured loans and the average loss to FHA when a loan goes to foreclosure, the amount of the premiums charged by FHA, the volume of loans that FHA insures, and current and future economic conditions.

Foreclosures and Associated Loss Severities

Traditionally, when an FHA-insured mortgage goes to foreclosure, FHA pays the lender the remaining amount that the borrower owes on the mortgage and takes ownership of the property.⁶ The payment to the lender is called a claim payment. The loss to FHA is the claim amount paid plus any other foreclosure-related expenses (such as the cost of maintaining the foreclosed property), minus any amount that FHA can recoup by selling the foreclosed home. FHA's total losses related to defaults and foreclosures can depend on, among other factors, (1) the number of delinquencies, defaults, and foreclosures on FHA-insured loans; (2) the success of efforts to help borrowers avoid foreclosure on FHA-insured loans or to minimize the costs to FHA associated with a foreclosure; and (3) how much FHA can recoup by reselling foreclosed homes.

Number of Mortgage Delinquencies and Foreclosures

The number of FHA-insured mortgages that become delinquent on mortgage payments impacts FHA's financial status because higher numbers of delinquencies are likely to translate into higher numbers of foreclosures and more claims paid out by FHA.⁷ Not all delinquent or defaulted mortgages will necessarily result in completed foreclosures, but higher delinquency and default rates are more likely to lead to higher foreclosure rates. A number of factors can impact delinquency and default rates, including the credit quality of the insured mortgages and economic conditions, such as unemployment rates. Events that cause major shocks to the economy—such as the financial crisis of the late 2000s and the COVID-19 pandemic—often lead to higher mortgage delinquency rates.

Loss Mitigation Efforts

Default and foreclosure rates can be affected by efforts to help borrowers avoid foreclosure, such as by offering mortgage modifications. Efforts to help borrowers avoid foreclosure and thereby mitigate the losses that the MMI Fund would experience due to a foreclosure are referred to as loss mitigation actions. When a borrower with an FHA-insured loan defaults, the servicer of the loan is required to evaluate whether the borrower is eligible for certain specified loss mitigation actions.⁸ If successful, these options can reduce the losses that FHA would otherwise bear on a troubled loan and help minimize losses to the MMI Fund. Some loss mitigation options are intended to result in a borrower keeping his or her home, such as loan forbearance or loan modifications.⁹ Other options will result in the borrower losing his or her home, but avoiding foreclosure, such as short sales and deeds-in-lieu of foreclosure.¹⁰

FHA pays incentive payments and, in some cases, partial insurance claim payments to lenders in connection with loss mitigation actions. These costs are likely to be less to FHA than the cost of paying a claim after a foreclosure. However, if the borrower defaults on the mortgage again in the future and the loan then goes to foreclosure, FHA could ultimately pay the full claim amount. Therefore, the extent to which loss mitigation actions minimize losses to FHA will depend on whether borrowers who receive any type of loan workout remain current on their mortgages or default again in the future.

Loss Severity Rates

If a mortgage must ultimately go to foreclosure, FHA may be able to recoup some of the claim amount that it pays to the lender by selling the property. In general, the amount that it recoups will usually be less than the claim amount. FHA also incurs costs related to managing and marketing foreclosed properties before they are ultimately sold. The amount of money that FHA loses on a given claim as a share of the outstanding loan balance, after accounting for any amounts it recoups from selling the property, is referred to as a loss severity rate.¹¹ A number of factors can affect loss severity rates, including the property disposition method used, home price trends, and the characteristics of the properties in question.

In recent years, FHA has increasingly used a variety of alternative property disposition methods that do not involve FHA taking ownership of the foreclosed property. These alternative methods can include short sales, bulk sales of severely delinquent loans prior to foreclosures being completed, and selling foreclosed properties directly to third parties at a foreclosure auction rather than conveying the properties to HUD. Different property disposition methods might result in different average loss severity rates.¹²

Mortgage Insurance Premiums

FHA charges fees, or premiums, to borrowers who obtain FHA-insured mortgages. These premiums are intended to cover the costs of any claims that are paid out of the MMI Fund. Borrowers pay both an up-front premium and an annual premium. These fees represent the main source of revenue flowing into the MMI Fund.

The amount of premium revenue that comes into the MMI Fund depends on a number of factors, including the amount of the premiums charged, the number and dollar amount of outstanding mortgages on which borrowers are paying premiums, and how many of these outstanding mortgages are ultimately prepaid—through refinancing the mortgage, paying off the loan, or going to foreclosure—resulting in the borrower no longer paying premiums. Raising premiums can bring more money into the insurance fund and help to ensure that FHA is pricing its insurance high enough to adequately cover its risks. However, if premiums are raised too high, fewer borrowers might choose to take out FHA-insured mortgages, potentially affecting the overall amount of premium revenue that FHA earns. Furthermore, raising premiums too high could reduce the overall quality of the mortgages that FHA insures by potentially making FHA-insured mortgages a less attractive option for all but the borrowers who present the largest credit risk. Higher premiums also increase the costs of FHA-insured mortgages for homebuyers, potentially making FHA-insured mortgages less affordable or pricing some potential homebuyers out of the market. Therefore, setting the appropriate levels for the mortgage insurance premiums involves balancing the objectives of maintaining affordability of FHA-insured mortgages and managing risk to the insurance fund.

FHA raised the annual premiums that it charges multiple times in the years following the housing market turmoil associated with the financial crisis of the late 2000s before announcing a decrease in the annual premium in January 2015. As of the cover date of this report, the current premiums have not changed since that date.¹³

Loan Volume

The number and dollar volume of loans that FHA insures plays a role in its economic stability.¹⁴ On the one hand, more loans insured by FHA could lead to more premium revenue coming into the MMI Fund as more borrowers pay premiums on their FHA-insured loans. On the other hand, more mortgages insured by FHA also increases FHA's liability for loan defaults. Ultimately, the quality of the loans insured and their future performance influence the overall impact of loan volume on the financial stability of the MMI Fund.

Economic Conditions and Projections

Economic and housing market conditions impact FHA's financial position in several ways. First of all, economic conditions can impact default and foreclosure rates. If more people become unemployed or underemployed, or if home prices fall such that people cannot sell their homes if they can no longer afford their mortgages, then more people may face default or foreclosure. Falling house prices also limit the amount that FHA can recoup when it sells a foreclosed property. Conversely, strong employment conditions may help to limit the extent to which people encounter mortgage distress due to job loss, and rising house prices can make it easier for distressed borrowers to sell their homes if necessary to avoid foreclosure.

Projections of future economic conditions are also important factors in evaluating the health of the MMI Fund. The expected future paths of house prices and interest rates, in particular, play large roles in estimating how FHA-insured mortgages will perform in the future and, ultimately, how much money is expected to flow into and out of the MMI Fund. The future path of house prices is important because, as noted, house prices play a role in default and foreclosure rates and in how much FHA can recoup on foreclosures. Interest rates are important because they can affect home purchase activity as well as the decision by homeowners to refinance their mortgages, which affects how much premium revenue FHA expects to earn as well as affecting FHA's potential liability for future claims. If borrowers with FHA-insured mortgages refinance into new mortgages that are not insured by FHA, those borrowers will stop paying premiums to FHA, reducing the amount of revenue that FHA takes in. However, FHA's overall liabilities will also be reduced since it will no longer be responsible for repaying the lender if the borrower defaults on the mortgage.

If assumptions about future economic conditions and their impact on loan performance are not accurate, then current estimates of the MMI Fund's financial position may also not be accurate.

The MMI Fund in the Federal Budget

This section describes how FHA-insured mortgages are accounted for in the federal budget in the year that the loans are insured and in the years thereafter. It includes a discussion of the circumstances under which the MMI Fund would need an appropriation in order to cover the cost of insuring new single-family loans in an upcoming fiscal year (a situation which has never occurred). It also discusses the circumstances under which the MMI Fund can draw on permanent and indefinite budget authority with Treasury to ensure it has sufficient reserves to cover higher-than-expected costs of loans insured in past years (an event that occurred at the end of FY2013).

Credit Reform Accounting and Credit Subsidy Rates

The Federal Credit Reform Act of 1990 (FCRA) specifies the way in which the costs of federal loan guarantees, including FHA-insured loans, are recorded in the federal budget.¹⁵ The FCRA requires that the estimated lifetime cost of guaranteed loans (in net present value terms) be recorded in the federal budget in the year that the loans are insured. The lifetime cost per dollar of loans guaranteed is reflected in the budget as a credit subsidy rate, and the credit subsidy rate multiplied by the total dollar volume of loans insured that year results in the total amount of credit subsidy for those loans.¹⁶

When a loan guarantee program is estimated to have a positive credit subsidy rate, it requires an appropriation to cover the cost of new loan guarantees before it can insure any new loans in that fiscal year. When a loan guarantee program is estimated to have a negative credit subsidy rate, it means that the present value of the lifetime cash flows associated with the guaranteed loans is expected to result in more money coming into the account than flowing out if it. Rather than requiring an appropriation, a negative credit subsidy rate generates negative subsidy, resulting in offsetting receipts. In the case of the MMI Fund, these offsetting receipts can offset other costs of the HUD budget.¹⁷

In accordance with the FCRA, each year as part of the President's budget request, FHA and the Office of Management and Budget (OMB) estimate the credit subsidy rate for the loans expected to be insured in the upcoming fiscal year.¹⁸ These estimates are based on factors such as projections of how much mortgage insurance premium revenue the loans insured in the upcoming year are expected to bring in, how much FHA will have to pay in future insurance claims related to those loans, and how much money FHA will be able to recover by selling foreclosed properties. These projections, in turn, rest on assumptions about the credit quality of the loans being made and assumptions about future economic conditions (including house prices and interest rates).

Since credit reform accounting was implemented, FHA's single-family mortgages have always been estimated to have negative credit subsidy rates in the year that they are insured.¹⁹ That is, over the life of the loans, the insured loans are projected to make money for the government rather than require an appropriation from the government to pay for their costs. (This applies only to the costs associated with the insured loans themselves; credit subsidy rates do not include the administrative costs of a program. FHA does receive appropriations for administrative contract expenses and for salaries.²⁰) The original credit subsidy rate estimates for FHA-insured loans have ranged from a low of -0.05% in FY2009 to a high of -9.03% in FY2015.²¹ The total amount of money that FHA would expect to earn on loans insured in a given year depends on the total dollar amount of loans it insures in that year as well as the credit subsidy rate. If FHA's single-family program were ever estimated to have a positive credit subsidy rate for the upcoming fiscal year, Congress would need to appropriate funds to cover the difference between the amount of money FHA would be expected to take in and pay out over the life of the loans in order for FHA to insure new loans in that year.²²

In the Biden Administration's FY2023 budget request, the credit subsidy rate for the MMI Fund, excluding reverse mortgages, was estimated to be negative 3.05% for FY2023. At an expected insurance volume of $225 billion, the budget estimated that the MMI Fund forward portfolio would earn about $6.9 billion in negative credit subsidy in FY2023.²³ However, the Congressional Budget Office (CBO) does its own credit subsidy estimates for the purposes of the congressional appropriations process, and these estimates can differ from those included in the budget request.²⁴

Under current law, subsidy rates for federal credit programs are estimated according to procedures specified in FCRA. Some have called for implementing alternative approaches for estimating subsidy rates using procedures that account for market risk. For a brief discussion of an alternative approach to calculating credit subsidy rates that could be more likely to result in the MMI Fund having a positive credit subsidy rate, see the text box, "FCRA and "Fair Value" Accounting."

Annual Credit Subsidy Rate Re-estimates

The amount of money that loans insured by FHA in a given year actually earn for or cost the government over the course of their lifetime is likely to be different from the original credit subsidy estimates due to better or worse than expected performance of those loans. Federal credit reform accounting recognizes this, and provides permanent and indefinite budget authority to federal credit programs to cover any increased costs of loan guarantees in the future.

Each year, in consultation with OMB, FHA re-estimates each prior year's credit subsidy rates based on the actual performance of the loans and other factors, such as updated economic projections. Although the original credit subsidy rate for the single-family mortgage insurance program each year has historically been estimated to be negative, the credit subsidy rate re-estimates for the loans insured in several fiscal years are currently estimated to be positive, suggesting that FHA will actually pay out more money than it earns on the loans insured in those years.

Table 1 shows the original credit subsidy rate estimates and the most current re-estimated credit subsidy rates (as of the date of this report) for the loans insured in each fiscal year between 1992 and 2021. The first column shows the original credit subsidy rate. In all cases the original subsidy rate estimates were negative (shown in green), meaning that the loans insured in those years were originally expected to make money for the government. The second column shows the current re-estimated credit subsidy rate for each year. Re-estimated credit subsidy rates are shown in green if they remained negative (even if they are less favorable than the original estimate) and in red if they have become positive. (See the PDF version of this report to see the table in color.)

For most years, the current re-estimated credit subsidy rate is less favorable than the original estimate, although many of the re-estimated credit subsidy rates are still negative. A less negative credit subsidy estimate suggests that the loans insured in that fiscal year will still make money for the government, but less than was originally estimated. In most years between FY2000 and FY2009, the re-estimates of the subsidy rates are positive (shown in red), meaning that the loans insured in these years are currently expected to lose money overall. In eight years—FY1992, FY2010, FY2012, FY2016, FY2017, FY2018, FY2020, and FY2021—the current re-estimated subsidy rate is more favorable than the original estimated subsidy rate, meaning that the loans insured in those years are now expected to make more money than originally estimated.

MMI Fund Account Balances

The credit subsidy rate re-estimates affect the way in which funds are held in the MMI Fund. The MMI Fund consists of two primary accounts: the Financing Account and the Capital Reserve Account.²⁵ The Financing Account holds funds to cover expected future losses on FHA-insured loans. The Capital Reserve Account holds additional funds to cover any additional, unexpected future losses. Funds are transferred between the two accounts each year on the basis of the re-estimated credit subsidy rates to ensure that enough is held in the Financing Account to cover updated projections of expected losses on insured loans. If the credit subsidy rate re-estimates reflect an aggregate increase in expected losses, funds are transferred from the Capital Reserve Account to the Financing Account to cover the amount of the increase in expected losses. If the credit subsidy rate re-estimates reflect a decrease in aggregate expected losses, funds are transferred from the Financing Account to the Capital Reserve Account.

Table 2 illustrates the changes in these account balances between FY2008 and FY2021. In the years following the housing market turmoil that began around 2007, the credit subsidy rate re-estimates showed aggregate increases in expected losses on FHA-insured loans, requiring large transfers of funds from the Capital Reserve Account to the Financing Account to cover these additional expected future losses. At the end of FY2008, the MMI Fund held $9 billion in the Financing Account and $19.3 billion in the Capital Reserve Account. The amounts needed in the Financing Account increased over the next several years and the amounts held in the Capital Reserve Account decreased, reaching zero at the end of FY2013 (when the MMI Fund received funds from Treasury to make a required transfer of funds to the Financing Account). By the end of FY2014, the MMI Fund had begun to rebuild its reserves, holding $7.3 billion in the Capital Reserve Account. As of the end of FY2021, the Capital Reserve Account held nearly $98 billion.²⁶

Although the total resources held in these accounts have increased over the last several years, the total dollar volume of mortgages insured by FHA has also increased, from about $400 billion at the end of FY2008 to about $1.3 trillion at the end of FY2021.²⁷

Permanent and Indefinite Budget Authority

Recognizing the fact that estimating the lifetime cost of loan guarantees is inexact, the Federal Credit Reform Act of 1990 includes permanent and indefinite budget authority for federal loan guarantee programs to cover the cost of credit subsidy rate re-estimates.²⁸ Therefore, if FHA ever needs to transfer more money than it has in the Capital Reserve Account to the Financing Account to cover an increase in expected losses on insured loans, it can draw on its permanent and indefinite budget authority to receive funds from Treasury to make this transfer without additional congressional action.²⁹

Any funds drawn from Treasury to make a required transfer of funds to the Financing Account are not spent immediately. Rather, they are held in the Financing Account, and used to pay claims to lenders only if the rest of the funds in the Financing Account are exhausted. If economic conditions and loan performance improve, or if loans insured in the future bring in enough money to both cover their own costs and pay for past loans that defaulted, it is possible that any money received from Treasury would never actually be spent. On the other hand, if future insured loans do not bring in enough funds to cover losses on past loans, or if economic conditions and loan performance do not improve, any funds received from Treasury could eventually be spent to pay actual claims.

When the President's budget request for FY2014 was released in April 2013, it included an estimate that the MMI Fund would need a mandatory appropriation of $943 million from Treasury during FY2013 in order to make a required transfer of funds from the Capital Reserve Account to the Financing Account.³⁰ FHA had until the end of FY2013 to make the required transfer of funds, and there was a possibility that the MMI Fund would bring in enough additional funds through the negative credit subsidy it earned on loans that it insured in FY2013 to make the required transfer without depleting the Capital Reserve Account. However, due to reduced loan volumes in FY2013, the MMI Fund earned less than anticipated during the year.

At the end of September 2013, HUD announced that the MMI Fund needed about $1.7 billion to ensure that enough money was available in the Financing Account to cover all expected future losses on insured loans. It received these funds from Treasury using the permanent and indefinite budget authority provided under the FCRA. This amount was nearly twice what was anticipated in the President's budget, and represented the first time that FHA had ever needed funds from Treasury to make a required transfer of funds from the Capital Reserve Account to the Financing Account.³¹ FHA has not needed to draw additional funds from Treasury to make a required transfer since that time.

Annual Actuarial Review and Annual Report to Congress on the Financial Status of the MMI Fund

Separately from the annual budget process, FHA is required by law to obtain an independent actuarial review each year that analyzes the financial position of the MMI Fund and to provide an annual report to Congress on the results of the actuarial review.³³ This review traditionally analyzes the MMI Fund's financial position by reporting the amount of funds that it currently has on hand and estimating the net amount (in present value terms) that it expects to earn or lose in the future on loans that it currently insures. These numbers are added together to compute the "economic value" or "economic net worth" of the MMI Fund. The economic value is the amount of money that the MMI Fund would be projected to have on hand after all of the cash flows associated with its insured loans are realized, assuming that it does not insure any more loans going forward. The results of the actuarial review are presented in FHA's annual report to Congress on the financial status of the MMI Fund.

The budgetary treatment and the actuarial review of the MMI Fund are two different ways of looking at the same thing—namely, how the loans insured under the MMI Fund have performed and are expected to perform in the future, and the effect of this loan performance on the financial position of the MMI Fund. However, the annual actuarial review is separate from the federal budget process, and uses somewhat different economic assumptions than those used in the federal budget. This section describes the actuarial review and accompanying annual report to Congress along with important related concepts. It then discusses the results of the FY2021 actuarial review and annual report that were released in November 2021.

In the annual actuarial review, the independent actuary reviews the MMI Fund's financial information to estimate the MMI Fund's current financial position, including both forward and reverse mortgages insured under the fund.³⁴ This usually includes reporting the amount of funds that the MMI Fund currently has on hand and estimating the cash flows that it expects in the future—such as premiums paid into the fund and claims paid out of the fund—on the loans that it currently insures. It uses economic modeling to project the MMI Fund's financial status for the current year and several years into the future under a "base case" scenario and several alternative economic scenarios. Some of the key terms used in the actuarial report and FHA's annual report on the financial status of the MMI Fund include the following:

• Capital resources are the net assets (assets³⁵ minus liabilities) that the MMI Fund currently has on hand that can be converted into cash to pay claims on defaulted mortgages or other expenses.
• Present value of future cash flows on outstanding business is the estimated amount that the MMI Fund is currently expected to gain or lose in the future, in present value terms, on the loans that it currently insures (this estimate does not take into account any new loans that might be insured in the future).
• Economic value or economic net worth is the MMI Fund's capital resources plus the present value of its future cash flows on outstanding business. It represents the amount of capital resources that the MMI Fund would have after expected future cash flows on currently insured loans are realized. In other words, it represents the amount that the MMI Fund could use to pay for any additional, unexpected losses on its outstanding loans.

The law also mandates that FHA meet a 2% capital ratio requirement, which means that the economic value of the MMI Fund must be at least 2% of the total dollar volume of mortgages that FHA currently insures.³⁶ The capital ratio is calculated on the basis of the actuarial report. The capital ratio fell below this 2% requirement in FY2009 and remained below 2% for several years thereafter, turning negative in FY2012 and FY2013. The capital ratio was estimated to be positive again in FY2014 and was estimated to exceed 2% in FY2015 and each subsequent year to date.

FY2021 Results

The FY2021 annual actuarial review and FHA's accompanying annual report to Congress on the MMI Fund's financial status were released in November 2021. In its annual report, FHA reported the MMI Fund's total capital resources to be $83.6 billion. This is the amount of resources that FHA currently has on hand that can be converted into cash to pay claims. FHA estimated the present value of future cash flows on insured loans (including both forward and reverse mortgages) to be $16.9 billion. In other words, in net present value terms, the loans that FHA currently insures are expected to result in an additional $16.9 billion for the MMI Fund over the remaining life of those loans. The economic value of the MMI Fund, therefore, was estimated by FHA to be approximately $100.5 billion ($83.6 billion + $16.9 billion), including both forward and reverse mortgages.³⁷ The independent actuary separately estimated the present value of future cash flows on insured loans for the MMI Fund. While the actuary's estimate differed somewhat from FHA's, it found FHA's estimate to be reasonable.³⁸

The estimated economic value of $100.5 billion was an increase of about $21.5 billion compared to FY2020, when the MMI Fund was estimated to have an economic value of $79 billion.

In FY2012 and FY2013, the MMI Fund was estimated to have a negative economic value. A negative economic value means that the funds that the MMI Fund currently has on hand, plus the present value of the funds that it expects to earn in premiums on loans that it currently insures, would not be enough to pay for the present value of claims on the loans that are currently insured. For example, in FY2013 the MMI Fund was estimated to have an economic value of negative $1.3 billion. This meant that, based on the MMI Fund's capital resources and estimates of future cash flows on insured loans as of the time the report was prepared, FHA was expected to be short about $1.3 billion when all of its currently insured loans were eventually paid off.³⁹ In contrast, the FY2021 economic value of positive $100.5 billion means that the MMI Fund would be estimated to have that amount left over after all of the expected future cash flows (including premium payments and insurance claims) on its currently insured mortgages were realized. This provides a "cushion" should future losses on insured mortgages be higher than currently anticipated.

The projections included in the actuarial report and the annual report to Congress rely on several assumptions. For one thing, the estimates of the MMI Fund's current status assume that FHA will not insure any more mortgages. In actuality, FHA will likely continue to insure loans, which will bring in additional resources in the form of premium revenues, but will also create new liabilities in terms of claims.

Furthermore, the actuarial review relies upon assumptions about future economic conditions. To the extent that actual future economic conditions differ from these assumptions, the estimates of the MMI Fund's value will also be different.⁴⁰ Although FHA estimates that the MMI Fund's economic value in FY2021 is positive $100.5 billion, it notes that, under a variety of alternative future economic scenarios, the MMI Fund's economic value could be different. Both the actuarial report and the annual report to Congress include analyses of aspects of the MMI Fund's financial position under various alternative economic scenarios.⁴¹

The 2% Capital Ratio Requirement

As noted earlier, the MMI Fund is also required by law to maintain a capital ratio of 2%.⁴² This is often referred to as the capital ratio requirement.

Brief History of the Capital Ratio Requirement

The capital ratio requirement for the MMI Fund was enacted in 1990 amid concerns about the solvency of the FHA single-family mortgage insurance program. At the time, the MMI Fund had a negative economic value. This meant that the expected future cash flows associated with the mortgages currently insured by the MMI Fund, when combined with the capital resources that the MMI Fund currently had on hand, were not expected to be enough to pay for all future claims on FHA-insured loans.

In response to these concerns, the Omnibus Budget Reconciliation Act of 1990 (P.L. 101-508) mandated that, going forward, the MMI Fund's economic value must be at least 2% of the total dollar amount of loans that it is currently insuring.⁴³ The capital ratio is an expression of the economic value of the MMI Fund as a percentage of the total dollar volume of loans insured by the MMI Fund. It is a measure of how much capital the MMI Fund will have available to pay for unexpected losses on currently insured loans, after the amounts estimated to be needed to cover expected losses are taken into account.

In addition to establishing the capital ratio requirement, P.L. 101-508 also directed FHA to make certain changes that were intended to improve the MMI Fund's financial condition. The changes that the law required included charging borrowers an annual mortgage insurance premium to go along with the existing premium that was paid upfront and suspending certain payments (known as distributive shares) that had previously been paid to borrowers under certain conditions. The law also established the requirement for the annual independent actuarial review of the MMI Fund. Some of these changes, such as the additional mortgage insurance premium, essentially meant that FHA would charge more to future borrowers to build up reserves to pay for losses on mortgages made to past borrowers.

As Congress considered the legislation prior to enactment, there was debate over the appropriate level for the capital ratio requirement.⁴⁴ This debate highlights the ongoing tension that FHA faces between maintaining its financial soundness and carrying out its purpose of expanding access to affordable mortgage credit for underserved borrowers. The 2% threshold was adopted because it was viewed as being high enough to provide FHA with a cushion to withstand some unexpected losses, but without imposing an undue financial burden on future FHA-insured borrowers. A higher capital ratio requirement would have likely required FHA to charge higher premiums for FHA insurance. It was recognized that a 2% requirement would likely be high enough to withstand moderate future economic downturns, but would likely not be high enough to allow the MMI Fund to withstand a catastrophic economic downturn. According to testimony from the General Accounting Office (GAO, now the Government Accountability Office) from 2000:

Determining what constitutes an adequate reserve level is essentially a question of what kinds of adverse economic conditions—moderately severe or catastrophic—the reserve should be able to withstand.... In the actuarial review of the Fund conducted by Price Waterhouse for fiscal year 1989, the researchers concluded that actuarial soundness would be consistent with a reserve that could withstand adverse, but not catastrophic, economic downturns. They further concluded that the Treasury implicitly covers catastrophic risk.... By contrast, rating agencies have taken the position, when evaluating private mortgage insurers, that they should have enough capital to withstand catastrophic risk.... However, requiring FHA to hold capital equivalent to that held by private mortgage insurers would likely impair FHA's public purpose.⁴⁵

While the law requires the Secretary of HUD to ensure that the MMI Fund maintains a capital ratio of 2%, it does not currently specify consequences or specific actions that the Secretary must take if the capital ratio falls below that threshold.⁴⁶ Furthermore, GAO has noted that the 2% capital ratio requirement does not take into account specific economic conditions the MMI Fund should be expected to withstand. It has suggested that Congress could consider enacting legislation to specify such conditions, and to require FHA to maintain a capital ratio that is based on the MMI Fund's ability to withstand those specific economic scenarios.⁴⁷

While the results of the actuarial review and the estimate of the capital ratio provide important information about the financial soundness of the MMI Fund, the results of the actuarial review and the capital ratio estimate do not determine whether or not FHA will need to draw on its permanent and indefinite budget authority with Treasury for funds to hold against expected future losses or to pay claims. That is determined as part of the re-estimate process that is done as part of the federal budgeting process each year, which is described in the "The MMI Fund in the Federal Budget" section of this report.

FY2021 Capital Ratio

The capital ratio is reported in FHA's annual report to Congress on the financial status of the MMI Fund. In FY2021, the annual report estimated the economic value of the MMI Fund to be $100.5 billion. The total dollar volume of mortgages currently insured by the MMI Fund was $1.25 trillion, which means that the capital ratio was estimated to be 8.03% ($100.5 billion divided by $1.25 trillion). This represents an increase from FY2020, when the capital ratio was estimated to be 6.10%. The capital ratio remained above 2% for the seventh straight year; FY2015 was the first time the capital ratio had exceeded 2% since FY2008.

In FY2009, the capital ratio was estimated to be 0.53%.⁴⁸ This was the first time that the capital ratio had fallen below 2% since the requirement was first met in FY1995.⁴⁹ The capital ratio remained below 2% from FY2009 through FY2014, when the capital ratio was estimated to be 0.41%.⁵⁰ In FY2012 and FY2013, the capital ratio was estimated to be negative 1.44% and negative 0.11%, respectively.⁵¹ FY2012 was the first time that the MMI Fund had been estimated to have a negative capital ratio since the early 1990s, when Congress enacted the series of changes aimed at ensuring the financial soundness of the MMI Fund, including the requirement for an independent annual actuarial review and the required capital ratio.⁵²

A negative capital ratio by itself does not trigger any special assistance from Treasury, although it suggests that such assistance could be needed at some point. Rather, any assistance from Treasury is triggered if the credit subsidy rate re-estimates described in the "Annual Credit Subsidy Rate Re-estimates" section show that FHA needs to transfer more funds than it has in its Capital Reserve Account into its Financing Account to cover increases in expected future losses. The amount of assistance required from Treasury is based on the credit subsidy rate re-estimates, not on the capital ratio or the economic value of the MMI Fund as reported in the actuarial report.

Table 3 shows the MMI Fund's financial position, including its economic value, dollar volume of insured mortgages, and capital ratio, as provided in FHA's annual reports to Congress on the financial status of the MMI Fund for each fiscal year between FY2006 and FY2021.⁵³

The drop in the capital ratio in the years immediately following 2007 resulted from both a decrease in the numerator of the ratio (the MMI Fund's economic value) and an increase in the denominator of the ratio (total dollar volume of mortgages outstanding) as the volume of mortgages insured by FHA increased. The decrease in the MMI Fund's economic value, in turn, was mostly due to the fact that the present value of future cash flows became increasingly negative for a time, suggesting that FHA was expecting large net cash outflows over the life of the loans that it was currently insuring.

Selected Issues

Potential Impact of the COVID-19 Pandemic

FHA's annual report to Congress reported strong financial results for the MMI Fund for FY2021 despite the ongoing COVID-19 pandemic, which has impacted the ability of many households to make mortgage payments. However, the continuing pandemic does pose ongoing risks to the MMI Fund, including risks stemming from the number of FHA borrowers who are seriously delinquent (including in forbearance) and uncertainties about the future trajectory of the economy.⁵⁴

FHA has taken a variety of steps in response to the pandemic, including implementing mortgage forbearance provisions that were included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) and placing a temporary moratorium on foreclosures on FHA-insured mortgages (the foreclosure moratorium expired at the end of July 2021).⁵⁵ As of the end of FY2021, about 9% of FHA-insured mortgages were seriously delinquent; nearly half of these seriously delinquent mortgages (47%) were in forbearance agreements while the remainder were not.⁵⁶ (As of March 2022, the share of FHA-insured mortgages that were seriously delinquent had fallen to about 6%.⁵⁷) The ultimate resolution of these mortgages—and the ultimate effects on the MMI Fund—remain uncertain as the effects of the pandemic and its impacts on households and the economy continue to unfold.⁵⁸ To the extent that future economic conditions differ from the projections used to estimate the MMI Fund's financial position, the ultimate resolutions of these mortgages and the associated financial impact on FHA could be different than anticipated. Ongoing house price appreciation, in particular, played a large role in the MMI Fund's strong financial position in FY2021. If house price trends should reverse, the impact on the MMI Fund could be significant.⁵⁹

Financial Status of the MMI Fund and Mortgage Insurance Premiums

As noted previously in this report, there is often a tension between the competing goals of safeguarding the financial status of the MMI Fund and expanding access to affordable mortgages to underserved borrowers. At times when the financial status of the MMI Fund appears strong, there are often calls to reduce or otherwise change FHA's mortgage insurance premiums to make FHA-insured mortgages more affordable to prospective borrowers. In response to the FY2021 MMI Fund annual report, there have been calls to reduce mortgage insurance premiums,⁶⁰ shorten the duration for which annual premiums are charged,⁶¹ provide more-targeted premium cuts for certain types of borrowers,⁶² or make other changes.⁶³

While FHA may consider making changes to its mortgage insurance premiums to increase affordability, it also has to consider the potential impact of any such changes on the MMI Fund. As noted in the previous section, and in FHA's annual report, several economic and COVID-19 pandemic-related uncertainties could impact the performance of mortgages insured under the MMI Fund going forward. In addition, economic projections—particularly related to house prices—play a large role in estimates of the MMI Fund's current favorable capital position. Changes in the trajectory of house prices could have a substantial effect on estimates of the MMI Fund's financial status and could rapidly reduce estimates of the MMI Fund's capital and capital ratio, as was the case in the years following FY2007. Such considerations are part of what FHA weighs in deciding whether, when, or how to make any changes to FHA premiums.

Role of FHA-Insured Reverse Mortgages in the Annual Actuarial Review

FHA-insured reverse mortgages, known as Home Equity Conversion Mortgages (HECMs), were moved into the MMI Fund beginning in FY2009. In contrast to traditional forward mortgages, HECMs are FHA-insured reverse mortgages for elderly homeowners who are seeking to access their accumulated home equity.⁶⁴ HECMs that were insured by FHA prior to FY2009 are obligations of a different FHA insurance fund, but HECMs insured in FY2009 or later are obligations of the MMI Fund.⁶⁵

The dollar amount of HECMs insured under the MMI Fund is much smaller than the amount of traditional forward mortgages: about $63 billion of the $1.3 trillion of insurance-in-force under the MMI Fund are HECMs.⁶⁶ However, changes in the estimated value of HECMs can have a significant impact on the MMI Fund's overall economic value and on the capital ratio.

Estimates of HECM performance are particularly sensitive to economic assumptions, such as future house prices and interest rates, making the value of the HECM portfolio volatile. While the value of forward mortgages insured under the MMI Fund has consistently increased since FY2012, the value of HECMs has been estimated to be negative more often than positive during that time frame.⁶⁷

The volatility in the HECM portfolio can be seen in the results of recent actuarial reviews and in the standalone capital ratios for the forward and HECM portfolios as reported by FHA. As shown in Figure 1, the standalone capital ratio for the forward mortgage portfolio alone has steadily increased from negative 0.91% in FY2012 to positive 7.99% in FY2021. In comparison, the standalone capital ratio for HECMs has fluctuated during that time period, ranging from a high of positive 6.08% in FY2021 to a low of negative 18.83% in FY2018.⁶⁸ Given the smaller overall insurance volume of the HECM portfolio, changes in the HECM portfolio's economic value can have a larger impact on the HECM standalone capital ratio than a comparable dollar volume change in the larger forward portfolio would have on the forward portfolio's standalone capital ratio. Nevertheless, the trends in the standalone capital ratios illustrate differences in the performance of the two portfolios.

Figure 1. Standalone Capital Ratios for Forward Mortgages and HECMs FY2012-FY2021

Source: HUD's Annual Report to Congress Regarding the Financial Status of the FHA Mutual Mortgage Insurance Fund for FY2017 (pp. 62 and 64), FY2018 (pp. 68 and 72), and FY2021 (p. 60). Notes: These standalone capital ratios reflect methodological changes that FHA implemented in FY2017 for both its current and prior-year figures.

The volatility of HECMs and their inclusion in the MMI Fund potentially raise some policy questions. In its FY2015 annual report on the status of the MMI Fund, FHA noted that including both HECMs and forward mortgages in the fund could make it more difficult to independently assess the financial health of the separate programs, particularly since the capital ratio for the entire MMI Fund is often used as a proxy for the performance of the much larger forward mortgage portfolio.⁶⁹ Furthermore, including both types of mortgages in the same fund could impact policies related specifically to forward mortgages, such as the level of fees paid by borrowers, in response to instability in the MMI Fund driven by HECMs.⁷⁰ For these reasons, some industry groups and other observers have argued that Congress should consider legislation to remove HECMs from the MMI Fund.⁷¹ However, GAO and others have noted that removing HECMs from the MMI Fund would involve tradeoffs.⁷²