TABLE 12.-Percentage distribution of home mortgage insurance written in mortgage pattern rating groups under the mutual mortgage insurance fund during calendar years 1950-60 (b) Recommendation. The analysis of the premium rate in the foregoing section of this report would appear to militate against any recommendation for a reduction in the premium in the future. However, a crucial test of feasibility for a reduction in the premium rate is the future reserve position of the mutual mortgage insurance fund. The reserve deficiencies previously noted as of December 31, 1959 and June 30, 1960-situations where estimated reserve requirements exceeded insurance reserves— were the direct result of recent substantial increases in new business and higher risk business. This development emphasizes, in appraising the feasibility of a reduction in the premium rate, the importance of assumptions as to the future volume and risk character of the insurance to be written. The Federal Housing Administration has from time to time undertaken a number of studies to determine under what circumstances a reduction in the premium would be practicable. Its most recent such study would indicate that a premium reduction might be feasible in the near future only on an assumption that the future volume of business would be at a level something under the record amount reached in 1959. Moreover, the terms of financing could not be significantly liberalized. If the prospect of these conditions could be realized with some assurance for a significant period in the future and if current default trends do not proceed beyond the scale of FHA's reserve assumptions, a reduction of a meaningful amount for both new business as well as old business in force might be in order. These conditions, however, are not easily met. The principal uncertainties confronting them are the requirements of public policy and the persistence of current default trends. If the requirements of public policy argue for further liberalizations of financing terms to extend the benefits of home ownership under Federal Housing Administration auspices and if this would mean further increases in the future volume of business, then, clearly the consideration of a reduction in the premium rate in the near future would have to be postponed. On the other hand, even if the requirements of public policy argued only for maintaining the present terms of financing until they are utilized to the fullest, it would not be a simple matter to meet the conditions for a premium reduction. The difficulty here would be in judging correctly what the future volumes of business in coming years would be and the scale of probable defaults for high-ratio, long-term mortgages. Past fluctuations in the volume of insurance written and recent default trends attest to this difficulty. A reduction in the premium rate would require legislative authority. Such legislative authority should take into consideration not only matters of actuarial and accounting soundness, but also matters of equity among mortgagors. Until such legislative authority is recommended, the Federal Housing Administration will, as it has since 1944, continue to discharge its responsibilities under provisions for mutuality in the mutual mortgage insurance fund paying dividends to mortgagors in amounts which are equitable and in accordance with sound actuarial and accounting practice. As of June 30, 1960, the mutual mortgage insurance fund had already paid to mortgagors $107,275,670 and had available for future payment $148,595,327. Combined, these amounts represent 31 percent of the total annual and prepayment premiums paid by mortgagors and collected by this fund. Mutuality is an effective insurance device for paying out excess income when it is not needed and reserving future income when it will be needed. Analyses and recommendations on mutuality not only for the mutual mortgage insurance fund but the other funds as well are presented in the second section of this part. While the prospect for a reduction in the premium rate for the mutual mortgage insurance fund is not altogether unreal, this can hardly be said for most other funds. This is either because they are too young or because they have a financial obligation to other funds. This distinction cannot be overemphasized for the reason that any reduction in the premium rate for mortgage insurance under the mutual mortgage insurance fund can be expected to precipitate pressures both on legislative and executive branches of the Government for similar premium rate reductions in other funds. To the extent that such pressures may be difficult to resist, there is a danger that the integrity of the insurance system will be jeopardized. 2. Insurance premium: War housing insurance fund (a) Analysis.-The war housing insurance fund was initially established in 1941 as the defense housing insurance fund. The bulk of the insurance assigned to this fund was on mortgages to finance housing, first, for emergency production workers during the defense preparedness period prior to World War II, and, then, during that war period, and, finally, for housing during the veterans' emergency period immediately after the war. Authority to write new insurance under this fund was terminated in 1950. Mortgage insurance was written on homes as well as rental projects. The annual premium was the same one-half of 1 percent of the average annual balance outstanding. The insurance programs administered under the fiscal provisions of this fund were among the first special purpose programs authorized by statute. Despite the uncertain or unusual circumstances surrounding the early history of this operation, the insurance experience of the fund has on balance developed favorably. This can be seen in table 13 which shows the comparative reserve position of this fund in recent years on the basis of the annual calendar year valuations. The valuation of reserve liabilities at December 31, 1957, showed that this fund had first attained a balance status and in the two succeeding valuations, its reserve position had further improved. Moreover, there is sufficient evidence already at the midyear to indicate that this improvement has continued. Insurance reserves have increased from $173.6 million at the yearend to $181.1 million as the income and expense statement shows in table 14. Moreover, the outstanding balance of insurance in force has shown a decline from $3.152 billion at the yearend to $3.017 billion at the midyear. This decline in the insurance in force which reflects aging of the business as well as terminations of insurance would reduce estimated reserve requirements in a fiscal year valuation. Whether this would result in raising the excess of insurance reserves over reserve requirements beyond the figure of $89.5 million attained at December 1959 would be difficult to measure without a formal valuation of the contracts in force. |