Despite falling house prices and rising claims, the Federal Housing Administration's mortgage insurance fund clung to a slim capital ratio of 0.24% on its book-of-business for the year ending Sept. 30, compared to 0.5% a year ago, according to independent actuarial reports released Tuesday morning.
The new audit results show that FHA has $2.5 billion of capital backing a $1 trillion portfolio of insured single-family loans. The government mortgage insurer also has set aside $31.2 billion of capital reserves for expected loan losses in the future.
The actuaries from Integrated Financial Engineering, Inc. assumed the U.S. would not suffer from a double-dip recession in determining FHA's financial health.
IFEI accountants used as their base assumption estimates made by Moody's Analytics that home values would fall 5.6% in 2011 and rise 1.2% in 2012.
Under this home price scenario, IFEI projects the FHA fund will reach its statutory minimum 2% capital ratio in FY 2014.
Many are skeptical, however, and recent reports by consultants and outside experts show that FHA is headed for greater losses and may need a government bailout in a few years.
FHA acting commissioner Carol Galante told reporters that she is "mindful and aware" of the downside risks to the FHA fund. "It would take very significant declines in home prices in 2012 to create a situation in which the current portfolio would require any kind of additional support," she said.
Galante noted the FHA fund could withstand an additional 4% to 5% drop in home prices above what Moody's Analytics predicts without going into a negative capital position.
If a capital infusion is needed, FHA can seek financial assistance from the Treasury Department. FHA would not be dependent on Congress for a bailout.
