Let us note that there is nothing wrong with making such a projection, but the result simply should not be called capital or a capital ratio.
So we need to rectify the title of the FHA's "capital" calculation to: "our capital plus all the profits we think we might make in the future."
If a number with as much estimating room in it as this one has goes substantially negative, as is the case at the FHA, there is no doubt the problems are very serious. In addition, if 30 years of all the future operating expenses were taken into account – which is not the case – the negative number would be bigger still. The rectified name for this is "bad news."
The FHA should calculate and publish its properly called capital under standard Mortgage Insurance Company GAAP accounting. It should then divide the capital by its total insurance in force to get its proper capital ratio, and publish that. Then it should, by all means, also publish its "capital plus all the profits we think we might make in the future" (after subtracting all operating expenses). Taxpayers could thereby be much better informed about what the FHA is charging up on their credit card.
Alex J. Pollock is a resident fellow at the American Enterprise Institute in Washington.