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OCR Page 1 of 117MEMORANDUM FOR
FROM:
SUBJECT:
DATE:
On March 6th, HUD released its annual actuarial review of the Mutual Mortgage
Insurance (MMI) Fund of the Federal Housing Administration (FHA). The review, conducted by
the independent auditing firm of Deloitte and Touche (D&T), suggested that receipts to the Fund
might exceed the level shown in your FY 2001 Budget by a total of $5 billion over the next five
years. On March 7th, you asked us to estimate the extent of any excess receipts, and to define
how any additional resources could be used to best strengthen our affordable housing efforts.
This memorandum provides our response.
In brief, we agree that actuarial review provides sound evidence that the fiscal health of
the Fund is improving. However, the increased profit per unit earned by the Fund will be offset
by lower than expected volume loan activity. Taken together, the latest evidence suggests that
budget receipts during the period FY 2002 2006 actually will be less than shown in FY 2001
Budget. On the other hand, the overall budget surplus will be far higher than anticipated by the
FY 2001 Budget. As you know, your Mid-session review included a sharply higher estimate of
the budget surplus, and set aside $XXX billion of that surplus for (future needs?). In the second
part of this memorandum we outline an important new proposal for subsidizing the construction
of affordable housing, and recommend that funding for this proposal be considered during
development of the FY 2002 Budget.
A. NEW ESTIMATES OF RECEIPTS TO THE MMI FUND
The Actuarial Review
FHA's MMI Fund protects private lenders against losses from defaults on FHA-insured
mortgages. The Fund derives income from fees paid by mortgagees. The Fund incurs expenses
when mortgagees default and lenders file claims against the Fund.
D&T's actuarial review examined the Fund's 'economic value' at the end of FY 1999.
'Economic value' was defined as the sum of the Fund's cash reserves plus the present value of
future cash flows associated with all outstanding mortgages (which can generate both income
(from fees) and expenses (from claims against defaults) until they are paid in full).
D&T estimated that the Fund had an economic at the end of FY 1999 that was $5 billion
greater than the amount projected at the end of FY 1998. The increase stemmed from principally
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