FHA Insurance Fund Remains Strong.(Federal Housing Administration)(Brief Article)

Mr. McCool, managing director for financial markets and community investments at the General Accounting Office, recently testified before a subcommittee of the House Financial Services Committee about the state of the Federal Housing Administration's single-family mortgage insurance fund. Given recent news that more than 10% of FHA-insured loans are delinquent or in default, increased public attention is being paid to the health of the program. This viewpoint is an excerpt of Mr. McCool's testimony.

At the end of fiscal year 1999, the Fund had capital resources of $14.3 billion. Using our models and forecasts of likely values of key economic variables, we estimated that the Fund had a net present value of future cash flows of $1.5 billion at that time. This yielded an estimated economic value of $15.8 billion and a capital ratio of 3.2%. Given the inherent uncertainty of these estimates and professional judgements involved, these numbers are comparable to those of Deloitte & Touche at the end of 1999, when Deloitte estimated that under expected economic conditions the capital value was $16.6 billion and the capital ratio was 3.66%.

Much of the difference seems to be the result of performing the analyses at different times. Because Deloitte performed its analysis before the end of fiscal year 1999, it had to estimate the Fund's capital resources and insurance-in-force, while we were able to use the year-end values. In its recent estimates for 2000, Deloitte noted that in the actuarial review for fiscal year 1999, it had overestimated the Fund's capital ratio for 1999; instead it adjusted the starting point for the 2000 estimate of economic value. If Deloitte had restated the economic value and capital ratio for fiscal year 1999, the 1999 values would likely have been smaller.

The Fund's economic value principally reflects the large amount of capital resources that the Fund has accrued. Because current capital resources are the result of previous cash flows, the robustness of the economy and the higher premium rates throughout most of the 1990s accounted for the accumulation of these substantial capital resources. Good economic times that are accompanied by relatively low interest rates and relatively high levels of employment are usually associated with high levels of mortgage activity and relatively low levels of foreclosure; therefore, ...