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FY 2010 Actuarial Review Excluding Hecms

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FY 2010 Actuarial Review Excluding Hecms Actuarial Review of the Federal Housing Administration Mutual Mortgage Insurance Fund (Excluding HECMs) for Fiscal Year 2010 October 12, 2010 Prepared for U.S. Department of Housing and Urban Development By Integrated Financial Engineering, Inc. If@ Phone: (301)309-6560 Fax: (301) 309-6562 IFE Group,51 MonroeStreet, Suite 801, Rockville,MD 20850,U.S.A [email protected] October12,2010 The HonorableDavid H. Stevens Assistant Secretaryfor Housing -- FederalHousing Commissioner 451 SeventhStreet. SW. Room 9100 Washington, DC 20410 Dear Mr. Stevens: IFE Group has completed and, along with this letter, is submitting the fiscal year 2010 Actuarial Review ofthe MMI Fund Excluding HECMs (the Fund). We estimatethat the Fund's economicvalue as of the end of fiscal year 2010 was $5.16 billion and the unamortized insurancein force was $926.25 billion. We project that at the end of fiscal year 2017 the Fund's economic value will be $39.58 billion and the unamortizedinsurance in force will be $1,300.23billion. We also estimatethat the economicvalue could be negativein FY 2010, and stay negative until FY 2013, under more pessimistic economic scenarios than those representedby the base-caseassumptions. The financial estimatespresented in this Review require projections of events more than 30 years into the future. These projections are dependent upon the validity and robustness of the underlying model and assumptions about the future economic environment and loan characteristics. These assumptions include economic forecasts by Moody's Analytics and the assumptions concerning future endorsementportfolios projected by FHA. To the extent that actual events deviate from these or other assumptions,the actual results may differ, perhaps significantly, from our current projections. The models used for this Review are,by nature, large and complex. We applied an extensivevalidation processto assurethat the results reported in this Review are accurateand reliable. The full actuarial report explainsthese projections and the reasonsfor the changessince last year's actuarialreview. Very truly yours, TylerY*E, Ph.D. IntegratedFinancial Engineering,Inc. Actuarial Reviewof the FederalHousing Administration Mutual MortgageInsurance Fund (ExcludingHECMs) for FiscalYear 20L0 I have reviewedthe 'oActuarialReview of the FederalHousing Administration Mutual MortgageInsurance Fund (ExcludingHECMs) for FiscalYear 2010," datedOctober 12,2010.The purpose of rny reviewwas to determinethe soundnessof themethodology used,the appropriatenessof the underlyingassumptions applied, and the reasonableness of the resultingestimates derived in the Review The Review was basedupon data and informationprepared by the FederalHousing Administration(FHA). I haverelied uponthe FHA for the accuracyand completeness of this data. In addition,I alsorelied upon the reasonablenessof the assumptionsused in the economicprojections prepared by Moody's Analytics,from which the basecase used in the Reviewwas derived. It is my opinion that on an overall basisthe methodologyand underlyingassumptions usedin the Review are reasonableand appropriatein the circumstances.In my opinion the estimatesin the Review lie within a reasonablerange of probablevalues as of this time althoughthe actualexperience in the futurewill not unfold asprojected. Phelim Boyle, Ph.D., FIA, FCIA Fellow of the Institute of Actuaries (UK) Fellow of the CanadianInstitute of Actuaries October12 2010 (Pt'-{) fL Table of Contents Executive Summary ................................................................................................... i I. Introduction .................................................................................................... 1 II. Summary of Findings ..................................................................................... 13 III. Current Status of the MMI Fund .................................................................... 25 IV. Characteristics of the Fiscal Year 2010 Book of Business ............................ 33 V. MMI Fund Sensitivities ................................................................................. 53 VI. Summary of Methodology ............................................................................. 61 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 Simulation Appendix D: Economic Forecasts Appendix E: Loss Rate Analysis Appendix F: Econometric Results FY 2010 Actuarial Review of MMIF Excluding HECMs Executive Summary Executive Summary The 1990 Cranston-Gonzalez National Affordable Housing Act (NAHA) requires an independent actuarial analysis of the economic net worth and financial soundness 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) 2010. The Housing and Economic Recovery Act of 2008 (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 by HUD and is excluded from the FY 2010 Actuarial Review reported here. In the remainder of this Review, the term “the Fund” refers to the MMI Fund excluding HECMs. The primary purpose of this study is to estimate the economic value of the Fund, defined as the sum of existing capital resources plus the net present value of the current books of business, excluding HECMs, and the total insurance-in-force (IIF) of the Fund, excluding HECMs, to be used by HUD in computing the aggregated economic value and capital ratio of the entire MMI Fund. Under the base-case assumptions we estimate that the economic value of the Fund as of the end of FY 2010 is $5.16 billion. This represents an increase of 88.9 percent from the $2.73 billion economic value as of the end of FY 2009. This increase is a result of several significant offsetting changes. Because the HECM business is excluded from this analysis, we do not report the capital ratio, but conclude that the capital ratio of the Fund, excluding HECMs, remains below two percent this year. We also conclude that under more-pessimistic economic scenarios than those represented by the base-case assumptions the economic value could be negative in FY 2010 and stay negative until FY 2013. IFE Group i FY 2010 Actuarial Review of MMIF Excluding HECMs Executive Summary A. Status of the Fund Exhibit ES-1 reports the base-case estimates of the Fund’s current and future economic value and insurance in force (IIF). Both the economic value and the IIF of the Fund are expected to increase each year over the next seven years. Exhibit ES-1 Projected Fund Performance for FYs 2010 to 2017 ($ Millions) Economic Economic Volume of Investment Unamortized Amortized Value of Fiscal Value of New Earnings a Insurance in Insurance Each New Year the Fund b b Endorse- on Fund Force in Force Book of c Business ments Balances 2010 5,160 926,251 879,875 5,698 292,825 2011 10,969 1,100,922 1,042,981 5,741 282,948 68 2012 14,858 1,235,987 1,165,415 3,580 267,382 309 2013 19,777 1,313,329 1,230,827 4,307 262,813 611 2014 24,243 1,301,850 1,209,729 3,576 230,580 891 2015 29,016 1,281,630 1,181,605 3,655 229,467 1,118 2016 34,033 1,281,264 1,175,122 3,618 243,022 1,399 2017 39,582 1,300,227 1,188,232 3,834 257,706 1,715 a All values are as of the end of each fiscal year. The economic value for each future year (FYs 2011 through 2017) 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, 2010, HUD projections of new endorsements, and projected loan performance. c Based on HUD September 2010 projection. 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 the flexibility of calculating 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. We also projected the performance of the Fund under five alternative future economic scenarios to assess the sensitivity of the results to key assumptions. Under the most adverse scenario, the economic value of the Fund at the end FY 2010 is -$17.80 billion, and the economic value IFE Group ii FY 2010 Actuarial Review of MMIF Excluding HECMs Executive Summary remains negative through 2014, becoming positive in FY 2015, and staying positive thereafter. In two other less severe recessionary scenarios, the economic values of the Fund are negative in FY 2010, but become positive sooner than FY 2013, and stay positive in all future years. Under the two remaining more optimistic alternative scenarios, the economic value of the Fund is positive
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