Case Study | Support for the Federal Housing Administration’s Economic Capital Reserve Estimation

Support for the Federal Housing Administration’s Economic Capital Reserve Estimation

Challenge: The Federal Housing Administration (FHA) plays a crucial role in the housing market by insuring mortgages for first-time homebuyers and elderly homeowners. To ensure the financial stability of its insured mortgage portfolio, FHA relies on advanced econometric and cash flow modeling. Summit has been a key partner in this effort, providing the expertise and tools necessary to forecast the financial performance of FHA’s Mutual Mortgage Insurance Fund (MMIF). FHA needed a robust and reliable system to evaluate the economic worth of the MMIF and forecast prepayment and default rates. This required addressing the unique financial risks and servicing rules associated with both forward and reverse mortgages. Additionally, FHA needed to ensure that its models were consistent with best practices and updated with the latest program features.

Solution: Summit developed the Risk Management and Capital Assessment Projections (RMCAP) suite of models to meet FHA’s needs. These models leverage state-of-the-art mortgage modeling methods, Amazon Web Services (AWS) cloud computing, and big-data engineering to provide accurate and timely forecasts. The RMCAP models synthesize payment and default data from millions of mortgages, enabling FHA to make informed decisions about its insured portfolio.

Summit adopted a multidisciplinary approach to develop and maintain the RMCAP models. The team included econometric modelers, statisticians, mortgage experts, and cloud and data engineers. They documented program rules, used AWS cloud computing for big-data estimations, and created a customized data analytics platform for FHA. This platform provides monthly portfolio analytics and allows users to create their own analyses. Technology highlights include:

1. Big-data engineering: RMCAP synthesizes payment and default data from hundreds of millions of mortgages. This data synthesis required significant data engineering efforts to structure disperse FHA data stored separately for various processes into concise, regularly updated databases.
2. Econometric modeling: Summit econometrically estimated the default and prepayment behaviors and their statistical relationship with macroeconomic series and borrower credit profiles. This modeling effort was crucial for accurate forecasting.
3. Data visualization: Summit hosted a customized data analytics and business intelligence platform for FHA using RStudio, Looker, and AWS software and infrastructure. This platform provides monthly portfolio analytics, including claim rates, loss severity trends, and real-time origination volumes. Users can also create their own analyses on the platform’s data warehouse.
4. Cloud services: RMCAP uses AWS cloud services to process extensive mortgage performance data, enabling large-scale econometric estimations and scenario analyses. The core of the platform utilizes an AWS Elastic Compute Cloud virtual server running Linux and hosting an instance of SAS Studio. This platform allows users to run analytics processes simultaneously, leveraging up to 72 cores of computational power and 5 terabytes of workspace.
5. Cybersecurity: The RMCAP system is designed to meet IT security requirements specified in NIST Special Publication 800-53, Revision 5. Summit works iteratively with stakeholders in the Department of Housing and Urban Development’s Office of the Chief Information Officer to ensure the RMCAP data management system maintains all required privacy and data security protocols.

Result: The RMCAP models have been successful for more than a decade, meeting FHA’s reporting requirements and excelling under financial audits. They support FHA’s Annual Report to Congress with detailed policy analyses and have been instrumental in ensuring the financial stability of the MMIF. The models undergo annual updates, with the Summit team revising them using new data and techniques to ensure up-to-date forecasts.

Summit’s partnership with FHA has been a resounding success, and the RMCAP models have provided FHA with the tools and insights needed to manage its insured mortgage portfolio effectively. By leveraging state-of-the-art methods and cloud computing, Summit has helped FHA navigate the complexities of the housing market during the COVID-19 pandemic, ensuring the financial stability of the MMIF.