FY 2014 Actuarial Review Excluding HECMs

246 Pages·2014·3.57 MB·English

Actuarial Review of the
Federal Housing Administration
Mutual Mortgage Insurance Fund
Forward Loans
for Fiscal Year 2014

November 17, 2014

Prepared for

U.S. Department of Housing and Urban Development

By

Integrated Financial Engineering, Inc.

Table of Contents

Executive Summary ................................................................................................... i

I. Introduction .................................................................................................... 1

II. Summary of Findings and Comparison with FY 2013 Actuarial Review ..... 15

III. Current Status of the MMI Fund .................................................................... 27

IV. Characteristics of the Fiscal Year 2013 Insurance Portfolio ......................... 37

V. Fund Performance under Alternative Scenarios ............................................ 53

VI. Summary of Methodology ............................................................................. 59

VII. Qualifications and Limitations ....................................................................... 67

VIII. Conclusions .................................................................................................... 69

Appendix A: Econometric Analysis of Mortgage Status Transitions and Terminations

Appendix B: Cash Flow Analysis

Appendix C: Data for Loan Performance Simulations

Appendix D: Economic Forecasts

Appendix E: Loss Severity Model

Appendix F: FHA Volume Model

Appendix G: Stochastic Simulation

Appendix H: Econometric Results

FY 2014 Actuarial Review of MMIF Forward Loans Executive Summary

Executive Summary

The 1990 Cranston-Gonzalez National Affordable Housing Act (NAHA) requires an
independent actuarial analysis of the economic net worth of the Federal Housing
Administration's (FHA's) Mutual Mortgage Insurance Fund. The Housing and Economic
Recovery Act of 2008 (HERA) moved the requirement for an independent actuarial review into
12 USC 1708(a)(4). This report presents the results of our analysis for fiscal year (FY) 2014.

HERA also moved several additional programs into the Mutual Mortgage Insurance Fund. One
of them, Home Equity Conversion Mortgages (HECMs, which are reverse mortgages) is
analyzed separately and is excluded from this Review. In the remainder of this Review, the term
“the Fund” refers to the MMI Fund excluding HECMs.

The primary purpose of this Actuarial Review is to estimate:

• the economic value of the Fund, defined as the existing capital resources, or total assets
less total liabilities of the Fund, plus the net present value (NPV) of the current books of
business, excluding HECMs, and

• the total insurance-in-force (IIF) of the Fund, excluding HECMs.

This year, we followed last year’s approach and used a stochastic method to estimate the net
present value of future cash flows. In 2011 and previous Reviews, the net present value of the
cash flows was computed along a single, deterministic path of house prices and interest rates.
Starting from the 2012 Review, instead of a single path, we generated 100 equally likely paths to
conduct a Monte Carlo simulation, and computed the net present value of the cash flows for each
of the paths. Then we averaged these 100 numbers to obtain our estimate of the expected net
present value of the future cash flows under our simulation procedure. This is our baseline
estimate.

Based on our stochastic simulation analysis, we estimate that the economic value of the Fund as
of the end of FY 2014 is positive $5.93 billion. This represents a $13.80 billion improvement
from the negative $7.87 billion economic value estimated in the FY 2013 Review. Because the
HECM portfolio is excluded from this analysis, we do not report the capital ratio of the Fund.

We project that there is approximately an 84 percent probability that the FY 2014 economic
value is positive. We also estimate that under the worst path among the simulated stochastic
scenarios, the economic value could stay negative through FY 2021. The FY 2014 economic
value under the worst path in the Monte Carlo simulation is negative $31.43 billion and under a
modified Moody’s protracted slump scenario it is negative $40.01 billion.

IFE Group
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FY 2014 Actuarial Review of MMIF Forward Loans Executive Summary

A. Status of the Fund

Exhibit ES-1 reports the estimates of the Fund’s current and future economic value and
insurance-in-force (IIF) using 100 simulated paths and taking the average of the resulting 100
economic values. Both the economic value and the IIF of the Fund are expected to increase each
year over the next seven years.

Exhibit ES-1: Projected Fund Performance for FYs 2014 through 2021 ($Millions)
Economic
Economic Volume Investment
Unamortized Amortized Value of
Fiscal Value of of New Earnings
Insurance- Insurance- Each New
Year the Funda in-Forceb in-Forceb Book of Endorse- on Fund
mentsc Balances
Business
2014 5,932 1,154,818 1,059,925 11,788 134,000
2015 16,161 1,158,756 1,049,949 10,213 124,505 17
2016 24,201 1,184,196 1,060,024 7,851 113,488 189
2017 33,022 1,220,041 1,079,960 8,275 119,065 547
2018 43,780 1,264,146 1,107,688 9,712 136,883 1,046
2019 55,330 1,311,234 1,137,046 9,856 141,338 1,695
2020 67,349 1,362,153 1,168,977 9,747 147,547 2,272
2021 80,541 1,420,350 1,207,055 10,364 159,462 2,828
a All values are as of the end of each fiscal year. The economic value for FYs 2014 through 2021 is equal to the economic value of the
Fund at the end of the previous year, plus the current year's interest earned on the previous Fund balance, plus the economic value of the
new book of business.
b Estimated based on the data extract as of June 30, 2014, our model of new endorsement volumes, and projected loan performance.
c Based on our endorsement volume forecast model described in Appendix F.

In defining the statutory capital ratio, NAHA stipulates the use of unamortized insurance-in-
force as the denominator. However, "unamortized insurance-in-force" is defined in the
legislation as "the remaining obligation on outstanding mortgages" – which is generally
understood to describe amortized IIF. To allow flexibility to calculate the capital ratio under
either definition, both the unamortized and amortized IIFs are reported in this Review.

The capital resources of the Fund at the end of FY 2014 are $19.62 billion. We simulated the
capital resources over the next seven years along the 100 possible future economic scenarios of
the stochastic simulation. From the 95th percentile path shown in Exhibit ES-2, we infer that
there is approximately only a 5 percent chance that the capital resources may fall to around $16
billion during the next seven years.

IFE Group
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