WASHINGTON (MNI) - The following is the text of Housing and Urban Development Secretary Shaun Donovan's statement, issued Thursday with the Federal Housing Administration's annual report to Congress on the status of the Mutual Mortgage Insurance Fund followed by excerpts from the report itself:

I am pleased to present to the Congress this annual report on the financial status of the Federal Housing Administration (FHA) Mutual Mortgage Insurance Fund. FHA is providing vital support to our national housing market during the most stressful economic conditions since the Great Depression. The role of FHA in supporting safe and sustainable homeownership opportunities to American families increased as conventional sources of mortgage credit became more and more restricted in 2008 and 2009. FHA and Ginnie Mae are fulfilling the role expected of them during this critical time in our nations history. I am proud of the work done by the dedicated professionals within these two organizations. They represent the best in public service and I am proud to be at HUD and to work with them.

This report transmits results of the FY 2009 actuarial study of the Mutual Mortgage Insurance Fund. The analysis has been performed by independent third-party contractors based on professional actuarial standards. In addition, as a part of the annual audit of FHAs financial statements, the models developed by these contractors are reviewed by the auditing firm hired by the HUD Inspector General.

This year, for the first time, we have added an actuarial study of the FHA reverse mortgage, or HECM, program, to the principal study of standard FHA single-family insurance programs supported by the Fund. This is because the Housing and Economic Recovery Act of 2008 added the HECM program to the MMI Fund family of programs, starting with FY 2009 insurance commitments.

The FHA single-family insured portfolio is experiencing high levels of stress resulting from declining property values and increased levels of income and job loss. The 2005 2008 books of business, in particular, have elevated delinquency rates and are anticipated to have high claim i rates as they continue to season. The independent actuarial studies are important for assisting HUD in establishing loss reserves to cover the potential costs of those future insurance claims. Actual loss reserve adjustments will be made in consultation with the Office of Management and Budget, as part of the annual budget re-estimation process, but the foundations for those adjustments come from the actuarial studies presented here.

In the meantime, the need to reserve more funds for anticipated claim costs on the current portfolio of insured loans results in a decrease in the measured capital ratio. The actuarys study concludes that, for the first time since 1994, the capital ratio has fallen below the required twopercent level. In several important steps to address risk, FHA Commissioner Stevens has already put in place a number of underwriting changes and appointed a Chief Risk Officer whose sole charge is understanding and addressing risk. We will continue to monitor patterns of delinquency and default, along with broader economic conditions, to alert us to any additional actions that need to be taken to protect the financial soundness of the FHA MMI Fund programs.

Loans insured since January 2009 should provide net positive revenues (after claim payments) for FHA. They do not have seller-funded downpayment loans, they include significant volumes of refinance activity with major monthly-payment reductions, and they have the stronger underwriting qualities mentioned above (higher incomes, higher credit scores, and lower payment burdens). The FY 2009 book is already showing its strength through lower rates of early-payment default. The early-payment default rateas measured by 90-day delinquencies within the first six monthly payment cycles peaked for FHA loans with originations in May 2007. It has been declining steadily since May 2008 and, as of January 2009, was just 59% of the 2007 peak. This improvement is the result both of higher underwriting quality, and what is hoped to be the passing of the peak period of employment contraction in the economy.

The Capital Reserve Account was established to facilitate the accounting required for managing the capital ratio requirement that exists for the Fund, and that will be discussed in this report. However, FHA's MMI Fund programs, like all Federal government direct-loan and loan-guarantee programs, operate with the full-faith-and-credit of the U.S. government. They also operate with what is called "permanent and indefinite budget authority" which provides direct access to the U.S. Treasury for any funds that might be needed to pay extraordinary claim obligations. Thus, FHA programs are never in any jeopardy of lacking sufficient funds to pay insurance claims. That would be true even in the absence of a Capital Reserve Account.

Today, as in 1990, recent books-of-business are experiencing elevated levels of stress. That is due both to historic declines in home prices around the country, and to elevated levels of income loss and unemployment. FHA's total reserves are higher than they were in 1990, measuring 4.5 percent of insurance-in-force today versus less than three percent in 1990. Yet, as in 1990, the independent actuarial studies highlighted in this report show that FHA could use-up most of its current reserves paying anticipated future insurance claims, in the absence of any new revenues from future books of business. The calculated net capital ratio for FY 2009 is below the required two-percent level, and is estimated to be just 0.53 percent, which is below where it was in 1990.

The primary difference today is that the just-completed actuarial studies show that FHA's capital reserve ratio will not dip below zero under most of the economic scenarios considered. Under these scenarios, premium rates are sufficient to pay for claims on new books of business, contribute toward the ongoing costs of expected claims on the older books, and then to start rebuilding capital in just a few years. The actuarial studies, as summarized here, indicate that the MMI Fund could regain a two percent net capital ratio as early as FY 2012.14 In 1990, FHA only charged a periodic premium and not an up-front premium. The periodic (monthly) premium was assessed at an annual rate of 0.50 percent of the loan balance.15 Today, FHA charges both a periodic premium and an up-front premium. The periodic is still 0.50 percent for loans with original loan-to-value ratios of up to 95 percent, but is now 0.55 percent for all loans with higher ratios. The up-front permium rate today is 1.75% for purchase and fully-underwritten refinance loans 1.50 percent for streamline refinance loans.

** Market News International Washington Bureau: 202-371-2121 **