FHA’s Insurance Fund Back in Black

For the first time in two years, the Federal Housing Administration's (FHA) mortgage insurance fund is back above water, according to an agency report.

Following an independent review of its finances, FHA reported to Congress Monday that its Mutual Mortgage Insurance (MMI) Fund is valued at $4.8 billion for the fiscal year 2014, a step up from last year's shortfall of $1.3 billion.

HUD said the fund's recovery "is a result of aggressive policy actions" instituted in the wake of 2012's actuarial report, which showed the fund was $16.3 billion in the red as a result of the housing crisis.

In the years since that report, HUD and FHA leaders have taken steps to restore the fund to health, including raising insurance premiums and stepping up underwriting criteria to reduce risk of future losses.

"This year's report shows that the fundamentals of the Fund are strong," said HUD Secretary Julian Castro. "This is positive news for the economy and the millions of American families that count on FHA."

While the latest report reflects a $21 billion turnaround for the agency's insurance pool, the fund's current capital ratio is only 0.41 percent, well below the 2 percent level FHA is supposed to maintain.

Still, it means the agency won't require another bailout—as it did last year for the first time in its history.

With the MMI Fund on relatively stable ground, HUD says it plans to focus on expanding mortgage availability through its "Blueprint for Access," the next step of which is the formal launch of its "Homeowners Armed With Knowledge" (HAWK) Program created to provide counseling and credit to underserved borrowers.

For now, industry groups are calling for FHA to bring mortgage premiums back down and eliminate a requirement that insurance be held for the life of a mortgage.

In a statement, the National Association of Realtors (NAR) estimated that nearly 400,000 creditworthy borrowers were priced out of the housing market last year alone due to elevated FHA insurance premiums.

"By lowering its fees, FHA could provide greater access to homeownership for historically underserved groups," said NAR President Chris Polychron. "A shift in policy would also increase the volume of borrowers acquiring FHA-backed loans and contribute to the solvency of the MMI Fund."

Not everyone agrees, however. Edward Pinto, co-director and chief risk officer of the American Enterprise Institute's International Center on Housing Risk, says FHA continues to insure loans with an "unacceptably high risk of default," with nearly one in four FHA homebuyers slated to be at risk of default if the economy experiences another downturn.

"Since FHA's financial future is still uncertain, now is not the time to reduce premiums. It has nowhere near the level of reserves to withstand even a minor recession," Pinto said. "Given FHA's current high risk practices, it would be imprudent to not stay the course; it should not lower premiums."