December 1957. The reserve excess served an important role in preventing the reserve position of the fund from deteriorating more than it did, as will be made clear presently. Finally, the third fact to be observed is the decline in this excess from a positive amount of $90.3 million to a negative amount, -$26.5 million, as of June 30, 1960. Reserve requirements at the recent fiscal year valuation, i.e., at June 30, 1960, exceed insurance reserves, as they did to a lesser extent at the previous calendar year valuation, i.e., at December 31, 1959. TABLE 3. Outstanding balances of insurance in force, insurance reserves, and estimated reserve requirements in the mutual mortgage insurance fund 1 1 For mortgage insurance contracts in force. Adjusted for estimated unearned premiums to be retained after refunds of unearned premiums upon prepayment. What accounts for this decline in the comparative reserve position of the mutual mortgage insurance fund? There are at least three factors of consequence: record and near-record amounts of new business, higher risk business, and higher insurance losses. The first two increase reserve requirements. The third limits the increase in net Lincome and thus limits the increase in insurance réserves. More important, however, than the effect on reserve requirements of new business written are the last two factors which reflect the liberalization of financing terms eligible for insurance. All other things being equal, the initial adverse effect of record and near-record volumes of new insurance written is in time reflected in additional income and thus serves to improve the reserve position by increasing the insurance reserves. Higher risk business and higher insurance losses, the other two factors, however, have a lasting adverse effect on both reserve requirements and insurance reserves. In support of these observations, it may be helpful to the subcommittee if some statistical evidence were shown. Table 4 shows for recent semiannual periods the volume of new insurance written, the net increase in insurance reserves, and the net increase in reserve requirements for all insurance in force. These record and near-record amounts of new insurance written have the effect of raising significantly the reserve requirements for the reason that reserve requirements are at their highest level for new insurance. This was pointed out earlier, and the reason, of course, is that the net amount at risk is highest when the mortgage is first made. As the mortgage is amortized, the net amount at risk declines. TABLE 4.-Semiannual changes in insurance written, insurance reserves, and reserve requirements in the mutual mortgage insurance fund, 1954-60 C 1 For mortgage insurance contracts in force. Adjusted for estimated unearned premiums to be retained after refunds of unearned premiums upon prepayment. The increase in insurance reserves thus far has lagged behind the recent increase in reserve requirements and this has resulted in the reserve deficiency in the reserve position of the fund pointed out in earlier paragraphs. (iii) Terms of financing: The second factor which has served to push up reserve requirements is the distribution of new business written in terms of comparative risk. The valuation process takes into account the measure of risk of each contract in force. Two of the elements affecting risk are maturity and loan-value ratio: The longer the term, the greater the risk; the higher the loan value, the greater the risk. The liberalization of financing terms has in fact concentrated on these two features of the mortgage transaction eligible for insurance. Table 5 shows the statutory and regulatory changes in these two features for home mortgages insured under this fund since the original statute was enacted. It is through these two features that liberalization of financing terms gets translated immediately into the reserve requirements status and later into the insurance reserves status. TABLE 5.-Statutory and regulatory provisions for the maximum loan-value ratio of the National Housing Act, as amended, on 1-family |