How FHA’s Mutual Mortgage Insurance Fund Accounts for the Cost of Mortgage Guarantees

Posted by Chad Chirico and Susanne Mehlman on
October 22, 2013

As discussed in yesterday’s blog entry, the Federal Housing Administration (FHA) guarantees certain single-family mortgages taken out by people who lack the savings, credit history, or income to qualify for conventional mortgages. The transactions associated with the FHA’s guarantee program for single-family mortgages are recorded in an account of the federal government known as the Mutual Mortgage Insurance (MMI) fund. Reviews of the financial status of that fund in recent years have raised some concerns that the fund could soon be exhausted and that the mortgage guarantee program would then need to be “bailed out” by the Congress.

As we wrote yesterday, recent estimates indicate that the guarantees of single-family mortgages provided by the FHA during the past two decades have been more costly for the federal government than was anticipated when those guarantees were made. If those estimates turn out to be at least roughly correct, the higher cost means that federal debt will be higher than it would have been otherwise. However, under current law, the MMI fund is automatically replenished to meet its obligations, and no action by policymakers is required to address any incipient shortfall in the fund. In fact, on September 30, 2013, FHA received a transfer of approximately $1.7 billion from the Treasury to help cover expected losses in the MMI fund.

How Is FHA’s MMI Fund Structured?

The MMI fund covers two housing programs operated by FHA: the single-family mortgage guarantee program and the Home Equity Conversion Mortgage (HECM) program. Budgetary accounting for the HECM program (also known as the reverse-mortgage guarantee program) has occurred through the MMI fund since 2009.

The MMI fund consists of two accounts: the financing account and the capital reserve account. The financing account records the cash flows associated with fee collections, payments by the federal government to honor the guarantees, and recoveries from the sale of homes after borrowers go into default. Those cash transactions are not recorded in the budget; instead, as we explained yesterday, the budget records, in the year a loan is disbursed, the expected present value of all of the cash flows over the life of the loan guarantee. The cash flows recorded in the financing account are relevant instead for the Treasury’s management of the government’s cash flows. The financing account is designed to hold sufficient funds to make the expected future payments needed to satisfy FHA’s single-family mortgage guarantees.

The capital reserve account holds additional funds, which are available to cover unexpected losses on those guarantees. (All federal credit programs have financing accounts, but only the MMI fund includes a capital reserve account as well.)

How Do the Funds in the MMI Fund Compare With the Projected Future Needs?

As we discussed yesterday, the single-family mortgage guarantees provided by the FHA during the past two decades have been more costly for the federal government than was anticipated when those guarantees were made. As a result, the balance in the MMI fund has shrunk over time.

Under the Omnibus Budget Reconciliation Act of 1990, Congress mandated that the MMI fund undergo an actuarial review by an independent auditor each year. The goal of this review is to estimate the amount of funds that would remain in the MMI fund after covering any expected future losses; that excess amount divided by the total amount of mortgages that have been guaranteed is known as the capital reserve ratio. By law, the capital reserve ratio for the MMI fund is supposed to be at least 2 percent. However, the estimated ratio fell below 2 percent in 2009 and has continued to decline since then, reaching negative 1.44 percent in the latest actuarial review released in November 2012.

Under current law, if the Secretary of Housing and Urban Development determines that the MMI fund does not have an estimated capital reserve ratio of at least two 2 percent, the Secretary may not distribute certain earnings from the fund to borrowers and may implement adjustments to the fees charged to future borrowers within statutory limitations.

Can the MMI Fund Run Out of Funds?

No. When the MMI fund has insufficient funds to cover losses on its programs, the fund receives an automatic infusion of funds from the general fund of the Treasury. That automatic infusion would occur because, under the Federal Credit Reform Act of 1990, all federal credit programs are provided with unlimited budgetary resources to cover the cost of loans and loan guarantees that have been made in prior years. (The authority to issue new loans and loan guarantees is provided by the Congress, generally in annual appropriations acts.) Thus, no legislative action is required to transfer sufficient funds to the MMI fund to cover any losses associated with FHA’s single-family or HECM programs.

Have Automatic Transfers to the MMI Fund From the General Fund of the Treasury Ever Occurred?

Prior to 2013, no transfers to the MMI fund were necessary. In fiscal year 2013, however, the balance in the MMI fund dropped below what was needed to cover losses on the single-family and HECM programs. In particular, an increase in the estimated cost of those two programs of $22.4 billion was recorded as a federal expenditure in September and the balance in the MMI fund fell by a corresponding amount, though additional cash flows in and out of the fund have been recorded since the start of fiscal year 2014. (Such changes in the estimated cost of federal loan and loan guarantee programs are known as “credit reestimates” and generally occur each fiscal year; the reestimates can vary in size and direction.)

In response to the MMI fund’s shortfall, FHA used its existing legal authority under FCRA to draw $1.7 billion from the Treasury into the MMI fund. This transfer of funds marks the first time that authority has been used by FHA. Because the transfer is an intragovernmental shift of funds, it did not affect the deficit; however, the increase in the estimated cost of the FHA’s programs raised federal spending and the deficit by $22.4 billion in the fiscal year just ended.

Chad Chirico and Susanne Mehlman are analysts in CBO’s Budget Analysis Division.