FY 2015 Actuarial Review Excluding HECMs

246 Pages·2015·6.64 MB·English

by  Bill Wang

Actuarial Review of the
Federal Housing Administration
Mutual Mortgage Insurance Fund
Forward Loans
for Fiscal Year 2015

November 16, 2015

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 2014 Actuarial Review ..... 15

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

IV. Characteristics of the Fiscal Year 2015 Insurance Portfolio ......................... 33

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

VI. Summary of Methodology ............................................................................. 63

VII. Qualifications and Limitations ....................................................................... 71

VIII. Conclusions .................................................................................................... 73

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

References

FY 2015 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. Enacted on July 30, 2008, 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
independent analysis for fiscal year (FY) 2015.

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, and

 the total insurance-in-force (IIF) of the Fund.

We use 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 using a single,
deterministic path of house prices and interest rates. Starting with 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 2015 is positive $17.04 billion. This represents a $11.11 billion improvement
from the positive $5.93 billion economic value estimated in the FY 2014 Review. Because the
HECM portfolio is excluded from this analysis, we do not report the capital ratio of the entire
Fund.

We project that there is approximately a 96 percent probability that the FY 2015 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 2022. The FY 2015 economic value under
the worst path in the Monte Carlo simulation is negative $18.44 billion and under a modified
Moody’s protracted slump scenario it is negative $57.31 billion.
IFE Group
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FY 2015 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 2015 through 2022 ($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
2015 17,044 1,150,452 1,046,224 11,920 193,005
2016 25,164 1,182,058 1,066,413 7,930 169,788 190
2017 31,306 1,242,344 1,111,083 5,611 152,487 531
2018 38,157 1,311,723 1,163,093 6,008 160,794 843
2019 46,672 1,387,943 1,221,268 7,338 191,313 1,177
2020 55,644 1,464,264 1,278,335 7,397 198,002 1,576
2021 64,940 1,542,191 1,335,924 7,338 210,382 1,957
2022 74,605 1,624,347 1,397,033 7,324 224,951 2,341
a All values are as of the end of each fiscal year. The economic value for FYs 2015 through 2022 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, 2015, 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 2015 are $21.23 billion. We simulated the
capital resources over the next seven years using 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 only approximately a 5 percent chance that the capital resources will fall below $19.86
billion during the next seven years.
IFE Group
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