Blog: New Analysis Demonstrates It’s Time to Modernize FHA’s Capital Ratio
Since 1990, the Federal Housing Administration (FHA)’s taxpayer-backed Mutual Mortgage Insurance Fund (MMIF) has been required by statute to maintain a positive economic value of 2% going forward to help cover any unexpected losses – a requirement often referred to as FHA’s 2% Capital Ratio. That was 35 years ago, and a lot has changed since then – including the Great Financial Crisis and updated, risk-based capital frameworks developed in its aftermath to ensure the housing finance system remains strong and resilient in the face of stress events. However, despite these significant changes, the 2% Capital Ratio remains the same to this day.
In the coming weeks, FHA will release its annual report to Congress detailing the financial status of the MMIF as of the end of the fiscal year. Every year, FHA provides an annual report to Congress on its fiscal condition. To help enhance transparency around the true fiscal condition of the MMIF and FHA’s forward mortgage program and contextualize these numbers, USMI commissioned Milliman, a third-party actuarial firm, to estimate the risk-based capital FHA would be required to hold if subject to the same capital frameworks as private mortgage insurers and the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac.
Milliman found that, if held to the same capital standard (PMIERs) that private mortgage insurers must meet to insure loans acquired by the GSEs in the conventional market, FHA would run a $31.7 billion shortfall. Similarly, FHA would need to hold $50 billion more to meet the GSE capital framework’s minimum requirement if applied to FHA’s book of business.
FHA is designed to enable access to homeownership for borrowers who may not qualify through traditional underwriting and plays an important countercyclical role in America’s housing finance system. It must remain strong and well-capitalized to perform these critical functions. After 35 years, Congress should consider replacing the 2% Capital Ratio requirement with an updated stress-based, loan-level risk-weighted standard that would ensure FHA has sufficient capital to meet its obligations during a time of severe stress, similar to how the GSEs and the private MI industry have built safeguards to ensure sufficient capital levels to withstand downturns.
Read our full policy brief here to learn more about why policymakers should consider modernizing FHA’s Capital Ratio to preserve safety and soundness in the housing finance system.
