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 the fiscal year (FY) 2012. This year, we used a stochastic method to estimate the net present value (NPV) of future cash flows. In previous Reviews, the net present value of the cash flows was computed along a single, deterministic path of house prices and interest rates. In this year’s 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 them. Then we averaged these 100 numbers to obtain our estimate of the expected NPV of the future cash flows under our simulation procedure. This provides our base case estimates. Based on our stochastic simulation analysis, we estimate that the economic value of the Fund as of the end of FY 2012 is negative $13.48 billion. This represents a $14.67 billion drop from the $1.19 billion estimated economic value as of the end of FY 2011. Because the HECM business is excluded from this analysis, we do not report the capital ratio of the Fund.

In addition that the 1990 Cranston-Gonzalez National Affordable Housing Act (NAHA) mandated that the Federal Housing Administration’s (FHA’s) Mutual Mortgage Insurance (MMI) Fund maintain a capital ratio of 2 percent from October 1, 2000 forward. The capital ratio is defined by NAHA as the ratio of the Fund’s economic value to its unamortized insurance-in-force (IIF). NAHA also established the requirement for the MMI fund to undergo an annual independent actuarial review. The Housing and Economic Recovery Act of 2008 (HERA) moved the requirement for an independent actuarial review into 12 USC 1708(a)(4). IFE Group was engaged by the Department of Housing and Urban Development (HUD) to conduct an independent actuarial review to estimate the economic value and IIF of the forward mortgages in the MMI Fund for FY 2012. One of the programs that were moved into the Mutual Mortgage Insurance Fund, Home Equity Conversion Mortgages (HECMs), is analyzed in a separate report and is excluded from this document. HUD will combine the results from the two separate reports to compute the consolidated economic value and the capital ratio of the entire MMI Fund. The combined economic value and the capital ratio of the entire MMI Fund are the measures specified by Congress to assess whether the MMI Fund meets the capital standards set forth in NAHA. We will refer to the forward mortgage portfolio excluding HECMs as “the Fund” in this report. The analysis in this review relies on information provided by HUD, such as the historical performance of the existing loans in the Fund and the projected composition of future mortgage originations. It also relies on future economic conditions based on Moody’s independent forecasts. IFE has created a distribution of simulation paths around Moody’s baseline forecast.