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U.S. Department of Housing and Urban Development Federal Housing Administration FHA Annual Management Report Fiscal Year 2006 U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, DC 20410-8000 ASSISTANT SECRETARY FOR HOUSINGFEDERAL HOUSING COMMISSIONER A MESSAGE FROM THE COMMISSIONER TO THE CONGRESS OF THE UNITED STATES, MEMBERS OF THE HOUSING INDUSTRY, AMERICA’S HOMEOWNERS AND TENANTS, AND THE PUBLIC: Every community throughout America values the pride and financial benefits that accompany homeownership. Homeownership is great for neighborhoods as owners improve property, take pride in their community, and develop deeper roots and interests in their hometown. Increasing homeownership, especially in the minority community, where the homeownership gap is most pronounced, is a top priority for the Federal Housing Administration (FHA). Expanding American homeownership, preserving affordable rental housing, accomplishing hurricane assistance, and remaining a financially sound entity were all priorities for FHA in Fiscal Year 2006. Expanding American Homeownership Act of 2006 FHA has proposed legislation that would revitalize the federal government's largest mortgage program. The bill, which overwhelmingly passed in the House 415-7 and awaits Senate action, would allow the FHA to offer flexible down payment options for the first time, increase permissible mortgage amounts substantially in high-cost markets, such as California, and provide low-interest rates and consumer protections that are rarely available from "sub-prime" mortgage lenders. The legislation also could open the FHA marketplace to more mortgage brokers, who are by far the largest source of home mortgages originated nationwide. With brokers able to offer both private-market sub-prime and FHA-insured mortgages, buyers with less-than-perfect credit will be able to directly compare FHA's rates, fees, and consumer protections with competing subprime loan offerings. The FHA would join the rest of the mortgage market in underwriting homebuyers based on their risk of default as measured by credit scores, down-payment amounts and financial profiles, thus allowing more lower-income borrowers the possibility of enjoying the many benefits FHA offers. The bill would authorize the agency to charge lower insurance premiums to applicants with lower risk of default — a standard operating procedure in the private marketplace. www.hud.gov espanol.hud.gov Katrina Accomplishments One Year Later FHA is committed to providing disaster relief to its borrowers. After the hurricane destruction at the end of Fiscal Year 2005, borrowers living in disaster-declared areas have been assisted through mortgage assistance or foreclosure relief efforts. FHA provided a limited extension of the foreclosure moratorium provided by Mortgagee Letter 2006-12 in that some Mississippi and Louisiana borrowers whose properties were moderately or severely damaged by the hurricanes may be eligible for grant assistance, but have not yet had the opportunity to apply for and receive funds. These grant funds would allow mortgagors to rebuild their homes or, if rebuilding is not feasible, preserve good credit standing by paying off their mortgage debt. Therefore, for borrowers who may be eligible to apply for Community Development Block Grant funds under either the Mississippi or Louisiana state programs, HUD extended the foreclosure moratorium. HUD entered into an agreement with the Federal Emergency Management Agency (FEMA) and established a protocol for the transfer of HUD Real Estate Owned (REO) properties to be made available to displaced families. In May 2006, to assist thousands of displaced families looking for affordable replacement housing, the Department began offering all HUD-owned homes at a discount to displaced homebuyers. People displaced by the hurricanes now have an opportunity to purchase the properties prior to the expiration of their lease at a ten percent (10%) discount and receive a fifteen percent (15%) escrow to cover needed repairs and/or household items. In addition, all displaced persons have an opportunity to purchase a HUD-owned home anywhere in the country prior to it being offered to the public at a ten percent (10%) discount off the list price. In an effort to assist these homebuyers with their purchases, HUD has made 100% financing available using its 203(h) loan program. Fiscal Year 2006 Management Report - Summary Even with declining endorsements, FHA remains financially sound with a capital ratio of 6.82 percent in the Mutual Mortgage Insurance Fund, substantially exceeding the statutory requirements of at least 2 percent. This financial capacity, as well as significant management initiatives and improvements, have afforded FHA the ability to continue to contribute to its primary mission of providing Americans access to homeownership opportunities, providing services to help families retain their FHA insured homes during economic hardships, increase the supply of affordable rental housing units, and help make possible the financing of healthcare facilities. Highlights of FHA’s Fiscal Year 2006 success are: First-Time Homebuyers. In Fiscal Year 2006, 79.3 percent of FHA-insured purchase loans involved first-time homebuyers, providing 248,953 families the ability to purchase their first home. Borrowers Experiencing Financial Difficulties. To assist homeowners facing financial difficulties remain in their homes, FHA again encouraged lenders to increase their use of loss mitigation tools. As a result, loss mitigation cases increased from 24,874 cases in Fiscal Year Table of Contents A Message from the Commissioner i Management’s Discussion and Analysis 1 Principal Financial Statements and Notes 37 OIG Report 83 Independent Auditor’s Report 87 Management’s Discussion and Analysis MANAGEMENT’S DISCUSSION AND ANALYSIS 1 Management’s Discussion and Analysis (THIS PAGE LEFT BLANK INTENTIONALLY) 2 Management’s Discussion and Analysis Certain information contained in this discussion is considered “forward-looking information” as defined by the Federal Accounting Standards Advisory Board’s (FASAB) Statement of Federal Financial Accounting Standards (SFFAS) No. 15, “Management’s Discussion and Analysis,” and Statement of Federal Financial Accounting Concepts (SFFAC) No. 3, “Management’s Discussion and Analysis Concepts.” Such forward-looking information includes estimates and is subject to risks and uncertainties that could cause actual results to differ materially from this discussion. Performance information contained in this Management’s Discussion & Analysis (MD&A) was obtained from operational and management sources and schedules prepared by management. The appropriate levels of FHA management reviewed the information and data to provide reasonable assurance that reported performance information is relevant and reliable. MISSION AND ORGANIZATIONAL STRUCTURE In 1934, Congress created the Federal Housing Administration (FHA) in the National Housing Act to expand opportunities for homeownership. The instability in the housing market and the breakdown of the banking system during the Great Depression heightened the need for FHA programs. Congress looked to the FHA to boost the depressed economy and solve the nation’s housing shortage. FHA has expanded its mission since its inception and now provides mortgage insurance to private lenders that finance single family homes, multifamily projects, healthcare facilities, property improvements, and manufactured homes. Availability of FHA mortgage insurance stabilizes the provision of mortgage credit in the marketplace and encourages the provision of credit to households not served or underserved by the private sector, most notably first time and minority homebuyers. FHA has also expanded its mission to include establishing housing quality standards and demonstrating the financial viability of new mortgage instruments. FHA and several other agencies were consolidated into the Department of Housing and Urban Development (HUD) in 1965. FHA’s headquarters are located in Washington, D.C. FHA has field offices located throughout the country, consisting primarily of 4 Single Family Homeownership Centers (HOCs), 18 Multifamily Hubs, and 33 Multifamily Program Centers. In many ways, FHA can be seen as a specialized insurance company that guarantees the payment of mortgages made by private lenders (banks and other mortgage lenders) who make loans to developers and homebuyers. This guarantee of payment enables lenders to provide market rate loans to all eligible purchasers. Since its inception 72 years ago, FHA has provided mortgage insurance to 34.2 million single family households and 49,259 multifamily projects containing 5.6 million units of housing. FHA currently has 3.9 million insured single family mortgages and 12,319 insured multifamily projects in its portfolio. FHA collects mortgage insurance premiums and other fees for insuring these loans. With these insurance premiums, fees collected, and a small appropriation for the general insurance fund, FHA has been financially self-sustaining, operating in a financially sound manner, pursuing its objectives and responding to the needs of its constituency. 3 Management’s Discussion and Analysis FHA Funds FHA operates its programs through four funds supported by premium and fee income, interest income, Congressional appropriations, borrowing from the U.S. Treasury, and other miscellaneous sources. The four funds are: The Mutual Mortgage Insurance (MMI) Fund. This fund supports FHA’s basic single family homeownership program. This fund is self-sustaining. The General Insurance (GI) Fund. This fund supports a wide variety of housing programs including rental apartments, cooperatives, condominiums, nursing homes, hospitals, property improvements, manufactured housing (Title I), home equity conversion mortgages, and disaster assistance. The Special Risk Insurance (SRI) Fund. This fund supports higher-risk single family and multifamily insured mortgages. The Cooperative Management Housing Insurance (CMHI) Fund. This fund supports insured loans on market-rate cooperatives. Historically this fund has been selfsustaining. At the end of fiscal year 2006, the MMI Fund comprised 80.08 percent of the FHA Insurance Fund; the GI Fund 19.13 percent; the SRI Fund 0.71 percent; and the CMHI Fund 0.08 percent. The total mortgage insurancein-force (IIF) in the FHA Fund was $395.8 billion, a decrease of $20.7 billion, or 5.0 percent, compared to fiscal year 2005. Specifically, the MMI Fund decreased by $18.3 billion, the GI Fund decreased by $1.5 billion, the SRI Fund decreased by $865 million, and the CMHI Fund, the smallest of the four, increased by $22.5 million. FHA Insurance Funds As of September 30, 2006 MMI Fund 80.08% GI Fund 19.13% CMHI Fund 0.08% SRI Fund 0.71% FHA’s IIF declines when interest rates decline and house price appreciation is high, as many FHA borrowers are able to refinance into conventional mortgages to eliminate the mortgage insurance premium they had been paying to FHA. FHA’s single family mortgage insurance business is 85.54 percent of its total IIF. The multifamily and healthcare insurance is 14.26 percent of IIF. Title I property improvement and manufactured home insurance is 0.19 percent of IIF. 4 Management’s Discussion and Analysis Office of Single Family Housing FHA’s Office of Single Family Housing administers programs that promote affordable housing. FHA encourages homeownership by making loans more readily available to lower and moderateincome families through its FHA mortgage insurance program. HUD-approved mortgage lenders handle all of the HUD/FHA-insured mortgage loan programs. Single Family Housing Programs Single Family Housing programs are the most visible evidence of FHA’s success in providing expanded homeownership opportunities for all Americans. Through these programs, FHA targets households that otherwise would have had difficulty obtaining mortgages. During fiscal year 2006, its programs insured 502,049 loans, of which 313,970 were initial purchase endorsements. Of these purchase endorsements, 248,953 were loans to first-time homebuyers and 76,114 were loans to minority first-time homebuyers. The two largest FHA single family programs are Section 203(b) and Section 234(c). The national homeownership rate as of third quarter 2006 is 69.0 percent, up 0.2 percent from 68.8 percent as of the same period in 2005. Despite the increase in the homeownership rate, FHA saw a decrease in market share due to rising house prices that decreased housing affordability within FHA loan limits and mortgage product innovations in the conventional and non-prime markets that have attracted borrowers who would have normally used FHA. However, FHA’s single family housing programs have made substantial contributions to the increase in the national homeownership rate over the past years (from 64.7 percent in 1995 to 69.0 percent today). In the President’s fiscal year 2007 budget submission, FHA requested legislative flexibility from Congress to offer mortgage insurance to first-time homebuyers regardless of how much cash they choose to invest in the transaction, because FHA can still provide a lower cost alternative to many borrowers who are being served in the prime and non-prime conventional mortgage markets. Additionally, FHA has greatly improved its business processes and is working with the Administration and Congress to develop new mortgage products and market the benefits of its mortgage insurance to lenders and the general public. Three of Single Family Housing’s more popular programs, Section 203(b), Section 234(c), and Reverse Mortgages, are described below in detail. Section 203(b) Section 203(b) is the largest of FHA’s single family programs covering 93.6 percent of total single family insurance-in-force. FHA established this program to create a stable mortgage finance market and to serve otherwise underserved borrowers by providing low down payment mortgages. Section 203(b) insures private lenders against loss in the event the borrower defaults on the mortgage. This insurance makes lenders more willing to originate loans to borrowers who do not meet conventional mortgage underwriting requirements. Additionally, lenders are more willing to make loans because they can package FHA-insured mortgages into mortgage-backed securities guaranteed by the Governmental National Mortgage Association, a secondary market entity backed by the full faith and credit of the U.S. Government. FHA insured 368,313 Section 5 Management’s Discussion and Analysis 203(b) mortgages in fiscal year 2006, of which 227,109 were first-time homebuyers and 71,536 were minority first-time homebuyers. Section 234(c) Section 234(c) covers 5.5 percent of FHA’s total single family insurance-in-force. This program provides mortgage insurance for individual condominium units. A condominium is a single unit owned by an individual or family in a multi-unit project with a shared interest in common areas and facilities. This form of ownership is usually more affordable than other single family housing and often attracts first-time homebuyers who lack the capital for single family homeownership. FHA insured mortgages for 20,288 condominium units in fiscal year 2006. Home Equity Conversion Mortgages (HECM) - Reverse Mortgages FHA was the first entity to promote and insure reverse mortgages on a national scale. The HECM program provides eligible homeowners access to the equity in their property with very flexible terms. The loan may provide a lump sum payment, monthly payments, a line of credit or a combination of the above. The financing allows homeowners to stay in their homes with no repayment requirement until the property is vacated or sold. The program is limited to homeowners 62 years of age and older and is designed for those with limited income. The HECM program has become increasingly popular as more homeowners choose to remain in their homes and tap into their home equity to pay living expenses. The program provides a valuable resource to persons traditionally underserved by the mortgage market. The number of reverse mortgages per year insured by FHA has increased over the past six years, from 7,793 cases in fiscal year 2001 to 76,375 in fiscal year 2006. Reverse Mortgages 76,375 80,000 70,000 42,921 60,000 37,788 50,000 Number Of Cases 40,000 per Year 30,000 20,000 12,996 16,224 7,793 10,000 2001 2002 2003 2004 Fiscal Year 6 2005 2006 Management’s Discussion and Analysis Fiscal Year 2006 Accomplishments During fiscal year 2006, FHA was highly successful in assisting many Americans to achieve or sustain the goal of homeownership. FHA assisted: First-Time Homebuyers. In fiscal year 2006, 79.3 percent of FHA-insured purchase loans involved first-time homebuyers. FHA provided 248,953 families with the ability to purchase their first home during the fiscal year. Minority First-Time Homebuyers. In fiscal year 2006, 31.7 percent of first-time homebuyers who obtained FHA-insured mortgages were minorities. Borrowers Experiencing Financial Difficulties. One of FHA’s most important goals is to assist homeowners facing financial difficulties to remain in their homes through increased use of loss mitigation tools. The use of these tools increased over the past eight years, from 24,874 cases in fiscal year 1999 to 75,528 in fiscal year 2006. Use of Loss Mitigation Tools 90,000 80,000 70,000 60,000 Number 50,000 of Cases 40,000 30,000 20,000 10,000 0 1999 2000 2001 2002 2003 2004 2005 2006 Fiscal Year Management Initiatives FHA implemented several initiatives and policies to ensure that its programs continue to serve target constituencies, while maintaining strong financial viability. These initiatives included: Predatory Lending Prevention. FHA continues to help prevent millions of families from becoming victims of predatory lending practices. These efforts include denying FHA insurance for mortgages on homes that have been "flipped" at inflated prices and deploying special monitors to pursue unscrupulous appraisers and lenders. Additional 7 Management’s Discussion and Analysis efforts to combat predatory lending will focus on print media advertising, publication of informational brochures, and other consumer outreach. Good Neighbor. HUD’s Good Neighbor initiative allows police officers, firefighters, emergency first responders and schoolteachers to purchase HUD homes at significant discounts. The purpose of the Good Neighbor initiative is to strengthen distressed urban communities and to provide homeownership opportunities for public service professionals. This program is a catalyst in promoting the sale and rehabilitation of vacant HUD properties in targeted neighborhoods. Credit Watch Termination. FHA’s Credit Watch Termination program identifies poorly performing mortgage lenders. FHA may temporarily suspend the authority of a branch office or offices of the poorest performing mortgage lenders to originate mortgage loans. The program also warns marginally performing lenders to improve their performance if they wish to maintain their status as approved FHA lenders and continue to participate in FHA insurance programs. TOTAL Scorecard. FHA’s Technology Open to Approved Lenders (TOTAL) Scorecard evaluates mortgage applications and credit information in an objective, consistent manner to assess the creditworthiness of FHA borrowers. The scorecard uses a methodology statistically proven to accurately predict the likelihood of borrower default. FHA developed the automated tool to identify potential homebuyers not currently served by the conventional market due to real or perceived risk. The lender must manually underwrite any loan assessed by TOTAL Scorecard as a “refer” designation to ensure that the applicant receives maximum consideration. Through September 30, 2006, 435,770 loans with case numbers had been scored by TOTAL. Of this amount, 310,113 single family mortgage loans were insured by FHA. Lender Insurance (LI). During fiscal year 2006, the Office of Single Family Program Development implemented a new initiative, “Lender Insurance,” that allows highperforming mortgagees to endorse FHA loans without a pre-endorsement review conducted by FHA. Instead, a mortgagee performs its own pre-endorsement review and submits loan level data to FHA via FHA Connection. Upon transmitting sufficient data to satisfy FHA of the legitimacy of the mortgage insurance request, the FHA Connection system performs an automated verification process to check the data for accuracy and completeness and electronically generates a mortgage insurance certificate to serve as evidence that the loan was endorsed. LI eliminates the need for mortgagees to submit case binders as a pre-condition for obtaining FHA’s mortgage insurance endorsement and therefore eliminates the need for binder re-submissions to satisfy Notices of Return (NORs). FHA will continue to select a sample of loans for post-endorsement technical review (PETR). LI provides the Department and its program participants enormous benefits by saving time, money and resources for all of the parties involved in the endorsement process. Customer service will dramatically improve under this program by providing lenders with prompt acceptance or denial of the endorsement package. Previously, mortgagees had to spend several days assembling the case binder and mailing it to the appropriate 8 Management’s Discussion and Analysis HOC. After its receipt, the HOC staff processed and insured the loan or returned it for additional documentation. This process generally took two business days, but sometimes lasted as long as several weeks if the case was returned because of the Notice of Return (NOR) procedure. Under LI processing, the NOR procedures are eliminated because endorsement occurs first and case binder review, on a selected sampling of mortgages, occurs later. Only those few mortgage insurance applications that fail risk mitigation tests will be reviewed before endorsement. FHA took the first step toward implementing LI with the publication of Mortgagee Letter 2005-36 on September 23, 2005. A pilot program was then operated out of all four Single Family HOCs between September 26 and December 31 that tested a paper-based version of LI along with the electronic case binder technology. HUD selected lenders to participate in the pilot program if they had technologies most compatible with those used by HUD. On January 1, 2006 HUD made LI available to all lenders. To qualify for participation in the LI program, lenders must be unconditionally approved for FHA’s Direct Endorsement program for at least the past two years and have an acceptable default/claim record at the time the application for participation in the LI program is processed. Accelerated Claims and Asset Disposition (ACD) Demonstration Program. In 2002, FHA implemented the ACD Demonstration program under Section 601 of the VA, HUD, and Independent Agencies Appropriations Act for fiscal year 1999 by conducting the first of four sealed bid auctions in which qualified bidders participated to acquire an equity interest in a forward pipeline of single family defaulted mortgage loans. The initial goals of the ACD Demonstration were to accelerate the claim submission time frame, align private interests with the Department’s, increase the recovery to FHA, and to support homeownership retention. By refining the current approach, FHA can potentially reduce losses from defaulted mortgages by accepting assignment of mortgage notes to HUD through the ACD Demonstration rather than paying conveyance claims and acquiring foreclosed properties. The Asset Sales Office has sold previously insured FHA notes through four competitive sealed-bid auctions of majority interests in public/private joint ventures. These Joint Ventures, in which HUD maintains minority ownership interest, then service, manage, and dispose of these defaulted single family mortgage loans. From October 2002 to September 2006, approximately 22,495 loans with loan balances of approximately $2.3 billion were sold into the Joint Ventures. The sale of these loans and their final dispositions resulted in receipts of approximately $594 million to HUD from the sale of the majority interest in the Joint Ventures plus approximately $1.1 billion in distributions of income paid at the monthly settlements by the private sector investors to the Department. Continuing refinements and uses of the 601 legislative authority will be made as a result of comments on the Advanced Notice of Public Rulemaking due late October 2006 and from recommendations of the evaluation of the demonstration. The Advanced Notice of Public Rulemaking will ensure that the program benefits from feedback during the policy making phase. The Department is currently planning to schedule another sale in fiscal year 2007 as a part of the ACD Demonstration, based in part on the comments received 9 Management’s Discussion and Analysis from the Advance Notice of Proposed Rulemaking process and on the findings from the ongoing evaluation of the program. The comments from the public will assist the Department to improve the program, move the initiative forward from the Demonstration to a permanent program and make it an even more valuable tool for the Department in the future. Other Single Family Improvements. FHA continues to focus its efforts to improve all stages of the single family mortgage insurance process. These efforts include improved data collection and reporting, improved controls over the post-endorsement technical review process, systems re-engineering, and an increased use of foreclosure alternatives to help homeowners retain possession of their homes. During fiscal year 2006, Single Family Housing continued a systems re-engineering and integration effort that started in fiscal year 2004. There are over 40 systems currently in operation using different database platforms with varying capabilities, which cannot easily share or provide critical information. This initiative will modernize all Single Family Housing systems, consolidate the systems in use, and help FHA to comply with federal legislation, to address audit weaknesses, to improve overall monitoring and oversight, and to adhere to HUD’s Enterprise Architecture Framework. In addition, the modernization of Single Family’s systems will simplify systems administration, reduce the total cost of ownership, provide flexible and adaptable business systems, and improve program support and oversight. FHA also undertook several actions during fiscal year 2006 to improve its overall risk management. These actions include improving oversight of Management & Marketing (M&M) contractors, revising protocols for monitoring appraisers listed on the FHA Rosters, revising delinquency rate reporting standards, and taking corrective actions against problem lenders, underwriters and appraisers. To fulfill the requirements of the President’s Management Agenda and help remove its programs from GAO’s high-risk designation Single Family Housing implemented updated management controls for contractors providing property management services with the publication of an M&M Quality Assurance Plan in November 2005. In December 2005 FHA published a Financial Control Manual for its Single Family Real Estate Owned (REO) divisions that provides guidance on the policies and procedures to be followed when reviewing and/or approving payments to contractors and other vendors. FHA also adopted industry-standard 30-day delinquency rate tracking, publishing a final rule establishing the new protocol in the Federal Register on March 31, 2006. Following the issuance of a mortgagee letter that specifies the exact data elements to be used under the new tracking protocol, FHA loan servicers will be allowed time to make the appropriate adjustments to their systems to utilize the 30-day delinquency rate information. FHA anticipates that loan servicers will complete these adjustments and that the new reporting standard will be in use by November 1, 2006. To complement its procedural and statutory risk-reduction initiatives, FHA has implemented or is developing risk-based targeting models and system changes to better monitor program performance and combat fraud in its programs. FHA officially 10 Management’s Discussion and Analysis implemented one such system, Appraiser Watch, during fiscal year 2004. This system relies on statistical analyses to identify appraisers who may contribute to poor loan performance based on certain risk factors, including association with high mortgage default rates compared to other appraisers. The monitoring approach incorporated into the Appraiser Watch system contrasts with the previous process performed by the Real Estate Assessment Center, by focusing on appraisers rather than appraisals. This saves time and money by reducing the number of physical property reviews that are required to identify and verify inadequate appraiser performance. Using this method, FHA removed 64 appraisers from the FHA roster during fiscal year 2006, compared to 151 appraisers during fiscal year 2005. FHA augmented the benefits provided by its Appraiser Watch system by implementing system changes to its Computerized Homes Underwriting Management System (CHUMS) that automate the appraiser review selection process. As of December 2005 FHA was able to automatically select appraisers for review on the basis of certain risk factors, such as high mortgage default rates compared to other appraisers, as well as on the basis of high volumes of excessive gifts, or fees exceeding six percent of a property’s sales price. In fiscal year 2005, FHA completed system changes to FHA Connection designed to combat fraud and identity theft by expanding its capability to validate social security numbers through other government agencies. FHA Connection is a web based tool through which approved lenders conduct business with FHA. A lender can verify data immediately upon entry of name, SSN and Date of Birth (DOB) into FHA Connection. However, if the first level of verification suggests a need for further direct verification with the Social Security Administration, the lender gets a response the following day. FHA uses a risk-based targeting model for REO properties. The Risk-Based Targeting Model (RBTM) was developed to assist in assessing the single family asset portfolio and the contractors’ performance. RBTM establishes benchmarking at both the macro and micro levels to determine which HOC, contractor, area or property demonstrates anomalous behavior and needs to receive specific and detailed attention. RBTM prioritizes which risk conditions need immediate follow-up and increases the effectiveness of ongoing monitoring and forecasting functions, while capturing property file review findings, tracking the success of corrective actions that have been implemented, and providing consistent, statistically-based review results. FHA expanded its Asset Control Area program (ACA) during fiscal year 2006. As of September 30, 2006, HUD had executed new ACA agreements with 3 local government and non-profit entities and currently has 13 ACA participants. HUD is working with one other entity to obtain revised applications and other documentation needed to secure their participation in the program. During fiscal year 2006 HUD sold 496 properties in communities designated for revitalization to ACA participants who are required to complete full rehabilitation and resell the properties to income eligible homebuyers. MMI Capital Ratio The MMI Fund constitutes the majority of FHA single family business, with 93.6 percent of the total single family IIF dollars. One measure of the fund’s financial soundness is the MMI capital 11 Management’s Discussion and Analysis ratio. The National Affordable Housing Act of 1990 requires an independent actuarial analysis of the economic net worth of the MMI Fund. The Act also mandates that the MMI Fund achieve a capital ratio, a measure of the Fund’s economic net worth, of at least 2 percent by the year 2000, which was achieved in 1995 and maintained ever since. M M I F u n d C a p ita l R a tio s 8 .0 0 6 .0 2 7 .0 0 4 .5 2 6 .0 0 5 .0 0 3 .5 1 4 .8 6 .8 2 5 .5 3 3 .7 5 4 .0 0 3 .0 0 2 .0 0 1 .0 0 0 .0 0 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 20 0 4 2 0 0 5 2 0 0 6 F is c a l Y e a r As illustrated above, the MMI Fund’s capital ratio met the 2 percent minimum requirement in 2000 and exceeded that minimum every year since. The MMI Fund’s capital ratio is estimated at 6.82 percent at the end of fiscal year 2006, compared to 6.02 percent in fiscal year 2005. The capital ratio is expected to be sufficient to withstand unexpected losses without exposing the taxpayers to financial risk. Office of Multifamily Housing FHA provides financing support for the development of rental housing and healthcare facilities through its Multifamily Mortgage Insurance programs. In fiscal year 2006, FHA initially endorsed 1,016 Multifamily loans totaling $5.13 billion. There are 12,319 mortgages held in the portfolio with an unpaid principal balance (UPB) of approximately $56.5 billion. Multifamily Housing Programs FHA’s largest multifamily programs in terms of insurance-in-force dollars are Sections 221(d)(4), 207/223(f), Section 223(a)(7) and 232. These programs, as well as the 242 Hospital Programs and Mark-to-Market Programs, are discussed below. Section 221(d)(4) Section 221(d)(4) has historically been FHA’s most popular multifamily program. It provides mortgage insurance for the construction or substantial rehabilitation of multifamily rental properties consisting of five or more units. FHA may insure mortgages for up to 90 percent of a project’s estimated replacement cost under this program. During fiscal year 2006, FHA endorsed 92 mortgages, covering 14,996 units, with a mortgage amount of $0.9 billion. At the 12 Management’s Discussion and Analysis end of fiscal year 2006, there were 2,265 active mortgages in place, covering 330,453 units, with an outstanding mortgage balance of $17 billion. The program makes up 30.1 percent of total multifamily insurance-in-force. Section 207/223(f) The Section 207/223(f) program provides mortgage insurance for the refinancing or acquisition of existing multifamily rental properties consisting of five or more units. Under this program, FHA may insure mortgages for up to 85 percent of a project’s appraised value, or up to 90 percent of a project’s appraised value in cases of refinancing or acquisition of properties formerly financed with Section 202/8 Direct Loans. The program applies to both formerly FHAinsured and conventionally financed properties. In fiscal year 2006, FHA insured 365 mortgages. These mortgages, valued at $1.7 billion, covered 36,998 units. At the end of the fiscal year 2006, the active portfolio consisted of 1,419 mortgages, covering 187,542 units, with a total outstanding balance of $6.41 billion. The program makes up 11.4 percent of total Multifamily IIF. Section 223(a)(7) The Section 223(a)(7) program provides mortgage insurance for the refinancing of existing multifamily rental properties with FHA-insured mortgages. In fiscal year 2006, FHA insured 235 mortgages. These mortgages, valued at $641.6 million, covered 24,084 units. At the end of the fiscal year 2006, the active portfolio consisted of 2,540 mortgages, covering 277,686 units, with a total outstanding balance of $6.6 billion. The program makes up 11.8 percent of total Multifamily IIF. Section 232 The Section 232 Mortgage Insurance for Residential Care Facilities program insures loans to finance the construction, substantial rehabilitation, acquisition or refinancing of healthcare facilities. Eligible facilities include nursing homes, intermediate care facilities, board and care homes and assisted living facilities. FHA insured 222 mortgages for $1.3 billion under this program in fiscal year 2006, providing 24,895 units/beds. At the end of the fiscal year 2006, the active portfolio consisted of 2,084 mortgages, covering 252,435 units/beds, with a total outstanding balance of $12.4 billion. This program makes up 22.0 percent of total Multifamily IIF. Section 242 The Section 242 Mortgage Insurance for Hospitals program provides hospitals access to affordable financing for capital projects, including new construction or modernization. Since its inception in 1968, FHA insured 343 hospital mortgages for $12.0 billion under the program. Clients range from small rural hospitals to major medical centers. Hospitals with FHA-insured loans serve as community anchors, providing jobs as well as healthcare services. FHA administers the program with assistance from the U.S. Department of Health and Human Services. FHA currently has 73 active hospital loans with an unpaid principal balance (UPB) totaling over $4.7 billion. FHA issued insurance commitments totaling $943 million for 9 hospitals in 7 states in fiscal year 2006. 13 Management’s Discussion and Analysis On July 10, The President signed the Rural Health Care Capital Access Act of 2006 into law. The law will help critical access hospitals, small rural hospitals located in some of the most underserved communities in the nation, qualify for HUD’s Section 242 mortgage insurance program. The Section 242 program has been the only option for rural communities that need to replace their aging critical access hospitals with facilities that can provide a high standard of care. Mark-to-Market Program FHA’s Mark-to-Market (M2M) program seeks to preserve affordable housing stock by maintaining the long-term physical and financial integrity of such housing and to reduce the Section 8 rental assistance costs and the cost of FHA insurance claims. Under the M2M program, the Office of Affordable Housing Preservation (OAHP) analyzes FHA-insured multifamily properties for which Section 8 rents exceed comparable market rents, and reduces the rents to bring them in line with comparable market rents or levels that preserve financial viability. Sometimes rent reductions can be accomplished and financial viability assured without affecting project debt. More frequently, however, M2M restructures FHA-insured mortgages on eligible multifamily projects. HUD/FHA analyzes properties under M2M and makes appropriate reductions to the mortgages to allow the project debt to be serviced with reduced subsidy payments while remaining financially viable with market rate rent schedules. The M2M process involves either a full or partial payment of claim by FHA on the original mortgage, followed by FHA’s commitment of a new mortgage that can be supported at market rents. In fiscal year 2006, OAHP completed mortgage restructuring on 286 (22,253 units) properties under the M2M program, with 90 percent resulting in reduced rents and Section 8 savings. Of the 286 properties with mortgage restructuring completed during fiscal year 2006, 130 properties resulted in full debt restructurings, contributing to the long-term preservation of 9,484 units. The restructurings represent an annual Section 8 savings (non-incurrence of cost) of $17.5 million. In addition, 58 properties (4,956 units) charged reduced rents only, representing an annual Section 8 savings (non-incurrence of cost) of over $13.2 million. In total, 188 properties representing over 14,440 units received reduced rents, resulting in annual savings (non-incurrence of cost) of over $30.7 million. Multifamily Housing Development The Office of Multifamily Housing Development provides direction and oversight for FHA mortgage insurance loan origination. HUD’s Multifamily Hubs and Production Offices initially endorsed 1,016 FHA-insured loans in fiscal year 2006, representing 112,019 units/beds and $5.13 billion in total endorsements. The loans included 85 Risk Sharing loans, totaling $429.6 million and 9,253 units, with state and other approved housing finance agencies. In comparison, FHA insured 1,017 loans in fiscal year 2005, representing 122,467 units/beds and $5.6 billion total endorsement. The combined number of multifamily endorsements was just one less loan than fiscal year 2005 activity. There was a significant decline in new construction and substantial rehabilitation apartment activity as well as in the number of FHA insured loans refinanced under Section 14 Management’s Discussion and Analysis 223(a)(7). This decline was offset by strong production in two major areas: Section 207/223(f) apartments and Section 232. Section 207/223(f) activity more than doubled to 365 loans due primarily to high activity (over 65%) in refinances of Section 202/8 direct loans. Section 232 activities also increased over 10% from 200 to 222 loans with a heavy emphasis on refinancing older nursing homes with major operators. Management Initiative for Multifamily Housing Development In fiscal year 2006, FHA implemented an initiative to ensure that its programs continue to serve its target constituency while maintaining the financial viability necessary to further its mission. The initiative includes: Lender Quality and Monitoring Division (LQMD) – o LQMD is FHA’s primary monitoring arm in determining the quality of MAP lender underwriting. In fiscal year 2006, LQMD out-stationed staff completed 40 project reviews focusing on troubled and large loans. Management Tools for Multifamily Housing Development The Office of Multifamily Housing Development has a number of tools in place to assist the Multifamily Hub and Program Centers to expedite and manage the development process. Multifamily Accelerated Processing(MAP). MAP shifts the responsibility for underwriting loans from HUD Staff to lenders. MAP has shortened HUD’s application review time because MAP approved lenders now prepare and review most of the application documents. During fiscal year 2006, 504 Multifamily loans were processed under MAP. These loans, valued at approximately $3.05 billion, covered 59,155 units. These include the following endorsements: New Construction/Substantial Rehabilitation of apartments, 232 Healthcare, and 207/223(f) refinancing eligible for MAP. All applications processed under MAP are subject to HUD field office review and quality control and HUD’s risk management reviews through LQMD. Lenders who do not follow FHA’s procedures are subject to administrative sanctions. Headquarters staff provides advice and guidance to MAP lenders and FHA field staff. Credit Subsidy. As a result of improved program performance and asset sales, FHA now only requires credit subsidy on all Section 223(d) operating loss loans and Section 221(d)(3) and 241(a) supplemental apartment loans that do not receive Low Income Housing Tax credit allocations. Streamlining. FHA issued Mortgagee Letter 06-03, which reemphasizes the importance of the Section 223(a)(7) refinancing program and updates processing procedures. Headquarters staff and the Hubs are working together on streamlining initiatives to improve processing. Delinquency/Claim Information. Headquarters is able to provide information on delinquencies and claims to the Hubs based upon reports compiled by GNMA and Housing’s Office of Evaluation. 15 Management’s Discussion and Analysis Multifamily Asset Management FHA’s Multifamily portfolio has 12,319 insured mortgages. At the end of September 2006, this portfolio covered 1.5 million units, with a total outstanding balance of over $56.5 billion. FHA held 2,990 notes in inventory, with a total outstanding principal balance of $3.3 billion. Management Initiatives for Multifamily Asset Management FHA’s Multifamily Asset Management has significantly improved the accuracy and timeliness of its information in recent years through automation and significant workload streamlining. Better management information and updated systems have allowed FHA to make improvements in the physical condition of the FHA Multifamily portfolio. Note Sales. To dispose of multifamily assets, HUD can either sell a property through foreclosure or sell the mortgage note. Note sales have historically demonstrated a greater return to the FHA Insurance Fund as compared to foreclosures. FHA conducted two Multifamily and Healthcare Loan Sales in fiscal year 2006. The assets included in the December 2005 sale had an estimated value to HUD, if retained, of roughly $102 million, or over 46 percent of UPB ($219 million). The net proceeds from the sale of these notes were over $134 million, over 61 percent of UPB, producing approximately $33 million in budget savings. The assets included in the June 2006 sale had an estimated value to HUD, if retained, of roughly $71 million, or over 45 percent of UPB ($156 million). The net proceeds from the sale of these notes were over $108 million, over 69 percent of UPB, producing approximately $37 million in budget savings. Combined, the 2 sales produced $70 million in budget savings to HUD. Lead-based paint. FHA continued to assess lead-based paint hazards in FHA-insured multifamily projects in fiscal year 2006. In addition to assessments, FHA monitors the owners’ actions to mitigate or correct the problem. Multifamily developed a monitoring and tracking report that will allow quarterly reviews of the owners’ compliance with the regulations. FHA will refer owners who fail to comply with the regulations to HUD’s Departmental Enforcement Center and the Office of Healthy Homes and Lead Hazard Control for enforcement action. Handicapped Accessibility Survey. In the past, HUD conducted nationwide surveys of HUD-insured and uninsured assisted multifamily properties to identify handicappedaccessible units. HUD then posted information on FHA-insured units accessible to handicapped individuals on its web site for public access. Under a new initiative, HUD has modified its management and occupancy review form and process to collect data on handicapped units as part of its annual review. Data will be collected in the Real Estate Management System (REMS), which will then be used to periodically update the information on HUD’s web site. Management Tools for Multifamily Asset Management The Office of Multifamily Asset Management uses a number of tools in its oversight of insured and subsidized properties, mortgage notes, and HUD-owned properties. 16 Management’s Discussion and Analysis Physical Assessment Subsystem (PASS). PASS is a subsystem that includes the automated implementation of the Uniform Physical Inspection Standards. The subsystem schedules inspections and provides notice to the owner and the inspectors. Using electronic data collection devices or handheld computers, inspectors are assigned a random selection of units to inspect by the system. The inspection results are uploaded to PASS, reviewed and posted on-line for the owner and HUD staff to review. In addition to the overall evaluation of the portfolio’s physical condition, HUD tracks the correction or mitigation of Exigent Health and Safety conditions identified in the physical inspection. The owner must correct or mitigate these conditions within 3 business days of the inspection and certify the correction or be subject to administrative action. HUD refers properties with scores less than 60 (out of a possible score of 100) to the Enforcement Center who then advises the owners that they have 60 days to bring the properties up to standard condition. HUD re-inspects the properties sometime after the 60-day period expires. If they remain below standard, HUD initiates steps to protect the tenants’ community and the government’s interests by taking action to permanently correct the problem. Possible options include sale or the physical transfer of the property, foreclosure, and/or termination of any subsidies. As of the end of fiscal year 2006, 479 (about four percent) of 11,930 properties insured and under management in the PASS system had scored less than 60. All of these properties are either being removed from the portfolio, or are under a compliance, disposition and enforcement plan or are being reviewed for one. Multifamily Default and Delinquency Reporting System (MDDR). MDDR is a Webenabled system for the collection, tracking, and reporting of FHA-insured mortgage delinquencies, defaults, and elections to assign. MDDR provides the basis for HUD’s quarterly report to Congress on multifamily defaults. Real Estate Management System (REMS). REMS is the primary system for HUD staff to review and manage multifamily properties. REMS draws its data from multifamily data systems, including the Financial Assessment Subsystem (FASS), the Physical Assessment Subsystem (PASS) and others. Financial Assessment Subsystem (FASS). The FASS subsystem collects annual project financial statement information and assesses a project’s financial performance and compliance, for the purpose of identifying financial risks and compliance deficiencies in need of loss mitigation or enforcement actions by the Office of Housing or the Departmental Enforcement Center. As part of an overall asset management strategy, FASS addresses open Office of Inspector General recommendations to improve the processing and use of annual project financial statement information. FHA continues to refine its financial evaluation indicators to better predict which properties may be facing financial difficulties that, if left unaddressed by the owner or HUD, would create a claim against the insurance fund. An enhanced FASS, integrated under Online Property Integrated Information Suite (OPIIS) with other data, creates better servicing and management priorities for staff in the local field offices. 17 Management’s Discussion and Analysis Online Property Integrated Information Suite (OPIIS). OPIIS (formally known as NASS) integrates HUD’s multifamily data systems including PASS, FASS, MDDR with REMS and external data for property and portfolio analysis. HUD staff use OPIIS to access multiple years of financial statements and physical inspection results to determine trends in property performance. OPIIS calculates an Integrated Risk Assessment score (IRA) based upon statistical analysis of defaults and delinquencies to predict the likelihood of claims against the insurance fund. The IRA is dynamically updated every time the applicable data change. Portfolio IRAs are used to establish workload priorities. A popular feature enables users to compare a given property with its peers based on location, size, and program characteristics selected by the user. Hurricane Relief Efforts As a result of damage incurred by Hurricane Katrina in the Gulf Coast and Southeast, HUD’s continuing efforts have been focused on providing relief to displaced residents. The Federal Emergency Management Agency (FEMA) has designated disaster areas that were directly affected by the hurricane in the states of Alabama, Florida, Louisiana, Mississippi, and Texas. For the Multifamily portfolio, the Department’s goal is to work with the owners to repair, rehabilitate or rebuild affordable housing units as quickly as possible and to maintain the rental subsidies (if applicable). HUD Mortgagee letter 2004-38 and Notices 04-22 and 05-20 provided guidance and policies in effect addressing mortgage forbearance, priorities for temporary and permanent rental housing, allowing multiple occupants in a unit, leases and rents, REAC inspections, use of escrows, and flexibility in occupancy. The Department issued additional guidance on September 9, 2005 and October 28, 2005 to provide clarity on policies and procedures regarding occupancy, the right to return for the displaced residents and other occupancy issues. Immediately after the hurricanes, the Department initiated its damage assessment protocol and process for all HUD-assisted properties (1,123) in the affected areas. The process included initial telephone assessments (both of the physical plant as well as the status of the residents), followed by physical site visits to the projects receiving moderate and serve damage and subsequent meetings (both individual and group) with the owners to discuss repairs, rehabilitation or rebuilding the properties and the identification of funding resources. The Department has completed all assessments and met with all the owners regarding their plans for the properties. In Alabama (225 properties) and Texas (69 properties), all repair and rehabilitation work on the properties has been completed or is anticipated to be completed by the end of 2006. In Mississippi (422 properties), work on approximately 90% of the properties has been completed or will be completed by the end of 2006. In Louisiana (407 properties), approximately 75% of repair and rehabilitation has been completed or is anticipated to be completed by March of 2007. The Department continues to monitor the status of the repairs, rehabilitation or rebuilding efforts for each property until the work is complete and the project is fully operational. For those projects that have been severely damaged or destroyed, the Department continues to work with the owners to rebuild on site and obtain the necessary financing or move the rental assistance, use agreement and/or mortgage to alternate sites under Section 318 of the HUD 2006 Appropriations Act. For the Single Family portfolio, borrowers with FHA-insured mortgages were protected from untimely foreclosure by a series of moratoriums that continued until late summer 2006 for the 18 Management’s Discussion and Analysis most severely impacted borrowers. Lenders effectively used HUD’s loss mitigation program to cure hurricane related defaults. From the date of the Katrina disaster through the end of fiscal year 2006, more than 25,000 FHA insured borrowers in the 5 Gulf States were able to retain home ownership through these long-term solutions. The Mortgage Assistance Initiative is a loss mitigation option that was crafted specifically for hurricane victims who were committed to rebuilding but needed help with mortgage payments during construction. To date, 550 families have received mortgage payment assistance of up to 12 months PITI. Additional assistance to victims is made available through Single Family Housing’s Section 203(h) program (Mortgage Insurance for Disaster Victims), in which families and individuals whose homes were either destroyed or severely damaged may obtain 100% mortgage financing for the purchase of a new home anywhere in the country. Since Hurricane Katrina struck, FHA has helped 535 individuals and families purchase new homes, with over 80% of the mortgages insured under this program located in the Gulf States of Louisiana, Mississippi and Texas. Typically, disaster victims have a one-year period to apply with a lender for a 203(h) loan. However, due to the unprecedented extent of destruction caused by 2005 hurricane season, FHA determined that the one-year period was insufficient to meet the housing needs of the hurricanes’ victims and extended the application period. Disaster victims of Hurricanes Katrina, Rita and Wilma now have until September 30, 2007 to file applications with lenders under the 203(h) Mortgage Insurance Program for Disaster Victims. Lenders have been advised that disaster victims have until September 30, 2007 to apply for the Section 203(h) program.Under an interagency agreement with FEMA, more than 2,000 families were provided emergency rental housing in HUD REO properties. HUD made minor repairs to homes in its inventory in the Gulf Region and leased the properties to hurricane evacuees for up to 18 months. Additionally, HUD is making permanent replacement housing available by selling properties in its nationwide REO inventory to hurricane evacuees at very special terms including a discount off the sales price. To date, 79 properties have been sold to evacuees and 71 transactions are pending. Many of these purchasers are also taking advantage of the 203(h) financing option. FHA has also kept close contact with the HUD-insured hospitals that have been affected by the hurricanes. For example, Baton Rouge General Medical Center (BRGMC), which suffered only minor damage from Hurricane Katrina, operated as a triage center while the community absorbs residents formerly of New Orleans. FHA is actively disseminating information to other affected hospitals about rebuilding, using Section 242 mortgage insurance. PERFORMANCE GOALS, OBJECTIVES, AND RESULTS The Government Performance and Results Act (GPRA) and the Government Management Reform Act (GMRA) mandate that Federal agencies improve their financial and program accountability. GPRA requires Federal agencies to develop multiyear strategic plans, set program goals, measure performance against the goals, and publicly report the findings. GMRA mandates improvements and reforms to promote better accountability and financial management of the Federal government. FHA has outlined a series of reforms designed to improve efficiency, responsiveness to clients, and accountability to the public. 19 Management’s Discussion and Analysis Office of Single Family Housing Programs The following sections summarize the Office of Single Family Housing’s success in meeting its fiscal year 2006 performance goals. Strategic Goal: Increase Homeownership Opportunities Resolve 50 percent of total claims on FHA-insured single family mortgages through loss mitigation. FHA established a national goal of resolving 50 percent of single family mortgage defaults via loss mitigation techniques. Single Family Housing surpassed this goal resolving 61 percent of defaults through loss mitigation techniques in fiscal year 2006. The fiscal year 2006 rate exceeds the 59.1 percent of mortgage defaults resolved using loss mitigation techniques in fiscal year 2005. Endorse at least 483,000 FHA single family mortgages nationwide. Although FHA did not establish an output goal in the Annual Performance Plan for the number of single family endorsements nationwide, the agency established an internal field-planning target of 483,000 endorsements. Homeownership Centers can use this target to allocate processing and underwriting workload across the nation to help increase single family homeownership rates. During fiscal year 2006, FHA endorsed 502,049 single family mortgages for insurance, exceeding the internal field-planning target of 483,000 endorsements. The 53,668 decrease in the total volume of single family mortgage insurance endorsements from fiscal year 2005 (555,717) is largely attributable to increasing mortgage interest rates and a slowing real estate market. Contributing factors include a reduced number of mortgage refinance transactions and strong homebuyer acceptance of products that FHA is unable to offer due to statutory constraints. Given these limitations, FHA focused its efforts on process improvements in order to make the program more compatible with the rest of the industry. These changes have been well received by lenders and real estate professionals, and as a result, more low-and moderateincome homebuyers are benefiting from FHA financing. FHA modernization legislation has been approved by the House of Representatives and is awaiting Senate approval. Passage of this legislation will reduce statutory barriers and increase FHA’s flexibility to respond to changes in the marketplace. As a result, FHA will be able to reach more prospective homebuyers to provide an alternative to sub-prime loans with high interest rates and closing costs, as well as expensive repayment penalties. Endorse 71 percent of FHA-insured single family home purchase mortgages to first-time homebuyers (HOC). To help increase the number of families able to secure financing for their first home FHA established a target of 71 percent for its Homeownership Centers for single family home purchase mortgage endorsements to first-time homebuyers. In fiscal year 2006, 79.3 percent of FHA-insured single family home purchase mortgages were to first-time homebuyers, compared with the target of 71 percent and the 79.0 percent achieved in fiscal year 2005. The consistency in the share of home purchase mortgages endorsed to first-time homebuyers from fiscal year 20 Management’s Discussion and Analysis 2005 (79.0 percent) may be attributable to FHA’s continued commitment to reaching first-time homebuyers. FHA will continue its efforts to reach potential first-time homebuyers through participation in conferences, seminars and other outreach events. Endorse 35 percent of FHA-insured first-time single family home purchase mortgages to minorities. To help increase the number of minority families able to secure financing for their first home FHA established a target of 35 percent for its Homeownership Centers for single family home purchase mortgage endorsements to minority first-time homebuyers. In fiscal year 2006, 31.7 percent of FHA-insured single family home purchase mortgages endorsed to first-time homebuyers were to minority homebuyers, compared with the target of 35 percent and the 34.4 percent achieved in fiscal year 2005. The decrease in the share of home purchase mortgages endorsed to minority first-time homebuyers of 2.7 percentage points may be attributable to increasing mortgage interest rates and a slowing real estate market. Contributing factors include a reduced number of mortgage refinance transactions and strong homebuyer acceptance of products that FHA is unable to offer due to statutory constraints. Given these limitations, FHA focused its efforts on process improvements in order to make the program more compatible with the rest of the industry. These changes have been well received by lenders and real estate professionals, and as a result, more low- and moderate-income homebuyers are benefiting from FHA financing. FHA modernization legislation has been approved by the House of Representatives and is awaiting Senate approval. Passage of this legislation will reduce statutory barriers and increase FHA’s flexibility to respond to changes in the marketplace. As a result, FHA will be able to reach more prospective homebuyers to provide an alternative to sub-prime loans with high interest rates and closing costs, as well as expensive repayment penalties. FHA will continue to pursue the President’s commitment to reaching minorities and increasing the minority homeownership rate through housing counseling program outreach and print and radio advertising. Strategic Goal: Strengthen Communities Endorse at least 35 percent of FHA-insured single family mortgages in underserved communities. FHA established a national goal to ensure that at least 35 percent of single family mortgages endorsed for insurance by FHA are in underserved communities, thereby enhancing homeownership opportunities in these neighborhoods. During fiscal year 2006, 40.2 percent (201,780 out of 502,049) of single family mortgages endorsed for insurance by FHA were in underserved communities. Strategic Goal: Embrace High Standards of Ethics, Management and Accountability The FHA Mutual Mortgage Insurance Fund meets congressionally mandated capital reserve targets. FHA’s Mutual Mortgage Insurance (MMI) Fund is responsible for all expenses, excluding administrative expenses but including insurance claims, incurred under FHA’s basic single 21 Management’s Discussion and Analysis family mortgage insurance program. The program is expected to be entirely self-financing through up-front earnings and annual insurance premiums paid by borrowers obtaining FHA mortgage loans, as well as from asset sales, earnings on fund assets and other income. The fund is subject to an annual actuarial review. The review assesses the fund’s current economic value, its capital ratio, and its ability to provide homeownership opportunities while remaining selfsustaining based on current and expected future cash flows. The capital ratio is an indicator of the MMI Fund’s financial soundness. The Cranston-Gonzalez National Affordable Housing Act required that FHA achieve a capital ratio of 2.0 percent by fiscal year 2000. FHA has met this requirement every year since fiscal year 1995. In fiscal year 2006, FHA achieved a 6.82 percent MMI fund ratio compared to 6.02 percent for fiscal year 2005. In the future, this ratio is expected to remain above the 2.0 percent goal. Average at least 68 percent net recovery rate per property sale. FHA established a net recovery rate goal of 68 percent per HUD Real Estate Owned (REO) property sale, to reduce insurance claim losses associated with foreclosures. During fiscal year 2006, the average net recovery rate per sale was 64 percent. This result falls short of meeting the goal set for this performance indicator in fiscal year 2006. Conduct 500 lender-monitoring reviews of FHA-approved lenders. HUD set a national goal to conduct 500 lender-monitoring reviews of FHA-approved lenders in fiscal year 2006. HUD exceeded that goal by conducting 569 reviews in fiscal year 2006. Sell 90 percent of FHA-insurable Real Estate Owned (REO) propertie