It insures private lenders against losses on certain home mortgages. If the borrower does not repay the mortgage and the home goes to foreclosure, FHA pays the lender the remaining amount that the borrower owes (that is, it pays a claim to the lender). The Mutual Mortgage Insurance Fund

Most single-family mortgages insured by FHA are financed through an insurance fund called the Mutual Mortgage Insurance Fund (MMI Fund). Since FY2009, the MMI Fund has included FHA-insured reverse mortgages as well as traditional "forward" home mortgages. The MMI Fund is intended to be self-supporting. As will be discussed in more detail later in this report, the MMI Fund, like all federal loan and loan guarantee programs subject to the Federal Credit Reform Act of 1990, has permanent and indefinite budget authority to receive funds from the Department of the Treasury to cover increases in the costs of loan guarantees made in prior years. This increase in distressed mortgages put pressure on the MMI Fund. First of all, economic conditions can contribute to default and foreclosure rates. It includes a discussion of the circumstances under which the MMI Fund would need an appropriation in order to cover the cost of insuring new single-family loans in an upcoming fiscal year (a situation which has never occurred), and the circumstances under which the MMI Fund can draw on permanent and indefinite budget authority with Treasury to reserve for higher-than-expected costs of loans insured in past years (an event that occurred at the end of FY2013). In the years following the housing market turmoil that began around 2007, the credit subsidy rate re-estimates showed aggregate increases in expected losses on FHA-insured loans, requiring large transfers of funds from the Capital Reserve Account to the Financing Account to cover these additional expected future losses. The amounts needed in the Financing Account increased over the next several years and the amounts held in the Capital Reserve Account decreased, reaching zero at the end of FY2013 (when the MMI Fund received funds from Treasury to make a required transfer of funds to the Financing Account). Annual Actuarial Review and Annual Report to Congress on the Financial Status of the MMI Fund

Separately from the annual budget process, FHA is required by law to obtain an independent actuarial review each year that analyzes the financial position of the MMI Fund and to provide an annual report to Congress on the results of the actuarial review. It represents the amount of capital resources that the MMI Fund would have after expected future cash flows on currently insured loans are realized. The capital ratio fell below this 2% requirement in FY2009 and remained below 2% for several years thereafter, turning negative in FY2012 and FY2013. A negative economic value means that the funds that the MMI Fund currently has on hand, plus the present value of the funds that it expects to earn in premiums on loans that it currently insures, would not be enough to pay for the present value of claims on the loans that are currently insured. While the results of the actuarial review and the estimate of the capital ratio provide important information about the financial soundness of the MMI Fund, the results of the actuarial review and the capital ratio estimate do not determine whether or not FHA will need to draw on its permanent and indefinite budget authority with Treasury for funds to hold against expected future losses or to pay claims. In FY2018, the annual report estimated the economic value of the MMI Fund to be $34.9 billion. The total dollar volume of mortgages currently insured by the MMI Fund was $1.265 trillion, which means that the capital ratio was estimated to be 2.76% ($34.9 billion divided by $1.265 trillion). This represents an increase from FY2017, when the capital ratio was estimated to be 2.18%. The lower capital ratio would have resulted from the combination of an estimated decrease of $3.2 billion in the net present value of expected future cash flows on insured mortgages (stemming from lower premiums that would have been paid on FHA-insured mortgages originated in FY2017, including some borrowers refinancing their existing FHA-insured mortgages into new mortgages with lower premiums) and an estimated increase of $45 billion in FHA's insurance-in-force (stemming from more people obtaining FHA-insured mortgages as a result of the premium decrease).
The Federal Housing Administration (FHA) insures private lenders against losses on home mortgages that meet certain eligibility criteria. If the mortgage borrower defaults (that is, does not repay the mortgage as promised) and the home goes to foreclosure, FHA pays the lender the remaining principal amount owed. By insuring lenders against the possibility of borrower default, FHA is intended to expand access to mortgage credit to some households who might not otherwise be able to obtain affordable mortgages, such as those with small down payments.
When an FHA-insured mortgage goes to foreclosure, the lender files a claim with FHA for the remaining amount owed on the mortgage. Claims on FHA-insured home mortgages are paid out of the Mutual Mortgage Insurance Fund (MMI Fund), which is funded through fees paid by borrowers (called premiums), rather than through appropriations. However, like all federal credit programs covered by the Federal Credit Reform Act of 1990, FHA can draw on permanent and indefinite budget authority with the U.S. Treasury to cover unanticipated increases in the cost of the loans that it insures, if necessary, without additional congressional action.
Each year, as part of the annual budget process, the expected costs of mortgages insured in past years are re-estimated to take into account updated information on loan performance and economic assumptions. If the anticipated costs of insured mortgages have increased, then FHA must transfer funds from a secondary reserve account into its primary reserve account to cover the amount of the increase in the anticipated cost of insured loans. If there are not enough funds in the secondary reserve account, then the MMI Fund is required to take funds from Treasury using its permanent and indefinite budget authority in order to make the required transfer.
Separately from the budget re-estimates, FHA is required by law to obtain an independent actuarial review of the MMI Fund each year. This review provides a view of the MMI Fund's financial status by estimating the MMI Fund's economic value—that is, the amount of funds that the MMI Fund currently has on hand plus the net present value of all of the expected future cash flows on the mortgages that are currently insured under the MMI Fund. The actuarial review is used to determine whether the MMI Fund is in compliance with a statutory requirement to maintain a capital ratio of at least 2%. The capital ratio is the economic value of the MMI Fund divided by the total dollar amount of mortgages insured under the MMI Fund.
In the years following the housing and mortgage market turmoil that began around 2007, increased foreclosure rates, as well as economic factors such as falling house prices, contributed to increases in expected losses on FHA-insured loans. This put pressure on the MMI Fund and reduced the amount of resources that FHA had available to pay for additional, unexpected future losses. The capital ratio fell below 2% in FY2009 and remained below 2% for several years thereafter, turning negative in FY2012 and FY2013. Concerns about FHA's finances culminated at the end of FY2013, when FHA announced that it would need $1.7 billion from Treasury to cover an increase in anticipated costs of insured loans. This marked the first time that FHA needed funds from Treasury to make the required transfer of funds between the primary and secondary reserve accounts.
More recently, the financial position of the MMI Fund has improved. The capital ratio again exceeded the 2% threshold in FY2015 and has remained above 2% in the years since. The FY2018 actuarial review of the MMI Fund estimated the economic value of the MMI Fund to be positive $34.9 billion and the capital ratio to be 2.76%. This suggests that the MMI Fund would have about $34.9 billion remaining after realizing all of its expected future cash flows on currently insured mortgages. The FY2018 results represent an increase from FY2017, when the capital ratio was estimated to be 2.18% and the economic value was estimated to be $26.7 billion.