Mortgage Financing: Actuarial Soundness of the Federal Housing Administration's Mutual Mortgage Insurance Fund

The Housing Affordability for America Act of 2002 establishes risk-based capital requirements for the Mutual Mortgage Insurance Fund of the Federal Housing Administration (FHA). Through the fund, FHA operates a single-family insurance program that helps millions of Americans buy homes. The Fund's estimated value rose dramatically in 1999, prompting proposals to spend current resources or reduce net cash flows into the Fund. The value of the Fund at the end of fiscal year 1999 was $15.8 billion. This capital ratio of 3.20 percent of the unamortized insurance-in-force exceeded the minimum required capital ratio of two percent. A two-percent capital ratio appears sufficient to withstand moderately severe economic downturns that could lead to worse-than-expected loan performance. Determining an appropriate capital ratio depends on the level of risk Congress wishes the Fund to withstand. FHA faces the failure of borrowers to perform, or credit risk, and the risk of managerial shortcomings, or operational risk. By defining the risk that the Fund must withstand, the act will define actuarial soundness and help FHA manage the Fund.