FY 2013 Actuarial Review Excluding HECMs

252 Pages·2013·3.66 MB·English

Actuarial Review of the

Federal Housing Administration
Mutual Mortgage Insurance Fund
Forward Loans
for Fiscal Year 2013

December 11, 2013

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 2012 Actuarial Review ..... 15

III. Current Status of the MMI Fund .................................................................... 25

IV. Characteristics of the Fiscal Year 2013 Insurance Portfolio ......................... 35

V. Fund Performance under Alternative Scenarios ............................................ 51

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 2013 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) 2013.

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. In this year’s Review, we have improved our Monte Carlo approach to make it more
flexible and more efficient.

Based on our stochastic simulation analysis, we estimate that the economic value of the Fund as
of the end of FY 2013 is negative $7.87 billion. This represents a $5.61 billion improvement
from the negative $13.48 billion economic value estimated in the FY 2012 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 a 22 percent probability that the FY 2013 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 2020.

IFE Group
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FY 2013 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 2013 through 2020 ($Millions)
Economic
Economic Volume Investment
Unamortized Amortized Value of
Fiscal Value of of New Earnings
Insurance- Insurance- Each New
Year the Funda Endorse- on Fund
in-Forceb in-Forceb Book of
mentsc Balances
Business
2013 -7,871 1,173,038 1,090,482 14,304 241,195
2014 7,838 1,266,026 1,166,530 15,725 190,977 -16
2015 18,711 1,313,592 1,195,266 10,842 136,615 31
2016 29,696 1,355,513 1,219,277 10,787 138,704 198
2017 42,283 1,392,485 1,238,942 12,023 148,027 564
2018 56,033 1,436,408 1,264,467 12,647 156,002 1,104
2019 70,262 1,483,728 1,291,881 12,606 158,104 1,623
2020 84,866 1,535,564 1,322,615 12,464 162,608 2,140
a All values are as of the end of each fiscal year. The economic value for FYs 2013 through 2020 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, 2013, 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. Following
the convention of previous Actuarial Reviews, most of our discussion in this Review focuses on
the unamortized IIF.

The capital resources of the Fund at the end of FY 2013 were estimated to be $20.56 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

IFE Group
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