Swamped with a record $70 billion of claims from residential servicers on loans originated from 2007-2009, the Federal Housing Administration (FHA) Friday said it would hike upfront insurance premiums by 10 basis points and aggressively begin selling nonperforming loans at an annual pace of 40,000 units a year.

The nonperforming loans sales – which will entail the disposal of only seriously delinquent loans – will commence in February, said FHA acting commissioner Carol Galante.

Moreover, not only will the agency hike the MIP, it is setting in place a regulation that will prevent all new mortgagors (going forward) to cancel their MI policy even if the loan-to-value ratio improves during the life of the loan.

At a Washington press conference, the agency confirmed that from an accounting standpoint its Mutual Mortgage Insurance fund is in the hole by $16.3 billion (with a negative capital ratio of 1.44%), although it has more than $30.4 billion in cash on hand to pay claims.

A new actuarial audit of the MMI, released late Thursday, does not take into account $11 billion in cash that FHA anticipates coming into the agency in the current fiscal year.

But HUD and FHA officials declined to say if the MMI might need to tap a line of credit it has with Treasury in the current fiscal year, suggesting that depending on premium hikes, asset management, and income from new books of business the fund may never actually go into the red from a cash flow standpoint.

In fact, the agency is projecting that within three years the MMI – which covers both "forward" mortgages and reverses – will be in the black by almost $20 billion.

As for the $70 billion in claims, it’s unclear how much of a hit FHA will take on those requests, agency officials said. In fiscal year 2012, for instance, FHA paid out $18 billion in claims.

Previous audits of the MMI did not anticipate the fund going negative but changes the agency and its accountants made regarding home price appreciation during the next few years altered that outlook.

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