Number range CHAPTER**Section III: Current Status of the MMI Fund**

As of the end of FY 2007, the MMI Fund had an estimated economic value
of \$21.277 billion. The corresponding economic value at the end of FY
2006 was \$22.021 billion, so that the current economic value is 3.38
percent lower than it was at the end of FY 2006. Two main factors
contributed to this reduction in economic value. First, the weakening
housing market during FY 2007 and the forecasted slow house price growth
rate continuing through most of FY 2008 caused claim rates realized in
FY 2007 and forecasted for future years to be much higher than those
previously estimated based on the June 2006 Global Insight economic
forecasts. Second, the concentration in loans receiving gift letters
from non-profit organizations did not decrease during FY 2007 as was
projected in the FY 2006 Review. While the numerator of the capital
ratio decreased, the denominator, IIF, increased from its FY 2006 value
of \$323.028 billion to \$332.293 billion: an increase of 2.87%. The
similar sizes of reduction in the economic value and the increase in IIF
lead the capital ratio to decline slightly from its FY 2006 level of
6.82% to its FY 2007 value of 6.40%. This decline is a reduction of 42
basis points.

In this section, we present an analysis of the MMI Fund\'s current
status. The analysis examines the situation of the Fund at the end of FY
2007 and the projected future performance for new books of business
through 2014. This section describes the basic components of the Fund\'s
economic value and how they are expected to change through FY 2014.

**A. Estimating the Current Economic Value of the MMI Fund**

According to the NAHA legislation, the economic value (or economic net
worth) of the Fund is defined as the \"cash available to the Fund, plus
the net present value of all future cash inflows and outflows expected
to result from the outstanding mortgages in the Fund.\" We base our
estimate of this value on the level of capital resources projected to
the end of FY 2007, plus the present value of expected future cash flows
of the existing loan portfolio as estimated from our financial models.

The MMI Fund assets comprise cash, Treasury investments, properties and
mortgages held by HUD, and other assets and receivables. Capital
resources are the total assets net of the liabilities of the Fund. Due
to the accelerated schedule required for delivery of this Actuarial
Review, the actual amount of the capital resources as of the end of FY
2007 was not available at the time this Review was prepared. Hence, we
had to project the end-of-FY 2007 capital resources based on the audited
capital resources as of the beginning of the year, to which we added an
estimate of the net cash flows occurring during the year.

The present value of expected future cash flows is calculated by a
financial model that uses the most current information available to
estimate future cash flows. Cash inflows include upfront premiums,
annual premiums, and investment returns. Cash outflows include claim
payments, premium refunds, administrative expenses, and distributive
shares.[^1] The cash flows included in these calculations cover those
from the origination year to the year of the scheduled maturity, *e.g.*,
30 years for 30-year mortgages. The steps in calculating the current
economic value and capital ratio of the MMI Fund are tabulated in
Exhibit III-1.

**1. Capital Resources**

Capital resources are the net assets of the MMI Fund that, if necessary,
could be converted into cash to meet Fund obligations. They are computed
by subtracting total liabilities from total assets. The assets consist
of cash, Treasury investments, properties and mortgages, other assets
and miscellaneous receivables net of payables. Exhibit III-1 reports the
audited MMI Fund's capital resources at the end of FY 2006 at \$24.222
billion.

The next step in estimating the capital resources as of the end of FY
2007 is to estimate the sources and uses of funds generated by the MMI
Fund portfolio. Two sources of cash flows are estimated: (1) the net
gain/loss from investment of the capital resources available at the
beginning of FY 2007, and (2) the net cash income from the mortgage
insurance policies. The net total returns on the beginning capital
resources was estimated to be \$1.214 billion during FY 2007, assuming
the capital resources realize an investment return of 5.01 percent.

Based on the econometric models and economic forecast, we estimated the
cash flows that were generated during FY 2007 by the books of business
from FY 1978 through FY 2007. These cash flows and any interest earned
from reinvestment become part of the total assets of the Fund. Exhibit
III-2 shows the results of this analysis. The net cash flow received
during FY 2007 was estimated to be negative \$71 million. The projected
FY 2007 year-end capital resource is computed to be \$25.365 billion.

Exhibit III-1

+------------------------------------------------+--------+------------+
| **Estimates of MMI Fund Economic Value for FYs |        |            |
| 2006 and 2007**                                |        |            |
+------------------------------------------------+--------+------------+
| **(\$ Millions)**                              |        |            |
+------------------------------------------------+--------+------------+
| **Item**                                       | **End  | **End of   |
|                                                | of FY  | FY 2007**  |
|                                                | 200    |            |
|                                                | 6^a^** |            |
+------------------------------------------------+--------+------------+
|                                                |        |            |
+------------------------------------------------+--------+------------+
| Cash                                           | \$     |            |
|                                                | 5,811  |            |
+------------------------------------------------+--------+------------+
| Investments                                    | 22,004 |            |
+------------------------------------------------+--------+------------+
| Properties and Mortgages                       | 1,628  |            |
+------------------------------------------------+--------+------------+
| Other Assets and Receivables                   | 255    |            |
+------------------------------------------------+--------+------------+
| Total Assets                                   | \$     |            |
|                                                | 29,698 |            |
+------------------------------------------------+--------+------------+
| Liabilities                                    | 5,476  |            |
+------------------------------------------------+--------+------------+
| Total Capital Resources                        | \$     |            |
|                                                | 24,222 |            |
+------------------------------------------------+--------+------------+
| Net Gain from Investments                      |        | 1,214^b^   |
+------------------------------------------------+--------+------------+
| Net Insurance Income in FY 2007                |        | \(71\)     |
+------------------------------------------------+--------+------------+
| **Total Capital Resources**                    |        | **25,365** |
+------------------------------------------------+--------+------------+
|                                                |        |            |
+------------------------------------------------+--------+------------+
| PV of Future Cash Flows on Outstanding         |        | (3,952)    |
| Business                                       |        |            |
+------------------------------------------------+--------+------------+
| Special Loss Reserve for Damages from 2005     |        | (136)^c^   |
| Hurricanes                                     |        |            |
+------------------------------------------------+--------+------------+
| **Economic Value**                             | **\$   | **21,277** |
|                                                | 22,02  |            |
|                                                | 1**^d^ |            |
+------------------------------------------------+--------+------------+
|                                                |        |            |
+------------------------------------------------+--------+------------+
| Unamortized Insurance-In-Force                 | 323,   | 332,293    |
|                                                | 028^d^ |            |
+------------------------------------------------+--------+------------+
| **Current Capital Ratio**                      | **6.82 | **6.40%**  |
|                                                | %**^d^ |            |
+------------------------------------------------+--------+------------+
| ** **                                          |        |            |
+------------------------------------------------+--------+------------+
| Amortized Insurance-In-Force                   |        | 305,449    |
+------------------------------------------------+--------+------------+
| **Current Capital Ratio with Amortized**       |        | **6.97%**  |
|                                                |        |            |
| **Insurance-In-Force**                         |        |            |
+------------------------------------------------+--------+------------+

^a^ Source: Audited Financial Statements for FY 2006.

^b^ Estimated by assuming the total capital resources as of the end of
FY 2006 earns an investment return equal to 1-year Treasury
Constant-maturity Rate, which averaged 5.01 percent during FY 2007.
(Source: Board of Governors of the Federal Reserve System).

^c^ Estimated by HUD as of October 2007.

^d^ From the FY 2006 Actuarial Review.

Exhibit III-2

+-------+-------+--------+-------+-------+--------+-------+--------+
| **Net |       |        |       |       |        |       |        |
| Cash  |       |        |       |       |        |       |        |
| Flow  |       |        |       |       |        |       |        |
| D     |       |        |       |       |        |       |        |
| uring |       |        |       |       |        |       |        |
| FY    |       |        |       |       |        |       |        |
| 2     |       |        |       |       |        |       |        |
| 007** |       |        |       |       |        |       |        |
+=======+=======+========+=======+=======+========+=======+========+
| **by  |       |        |       |       |        |       |        |
| O     |       |        |       |       |        |       |        |
| rigin |       |        |       |       |        |       |        |
| ation |       |        |       |       |        |       |        |
| F     |       |        |       |       |        |       |        |
| iscal |       |        |       |       |        |       |        |
| Year  |       |        |       |       |        |       |        |
| and   |       |        |       |       |        |       |        |
| Mor   |       |        |       |       |        |       |        |
| tgage |       |        |       |       |        |       |        |
| Type^ |       |        |       |       |        |       |        |
| a^(\$ |       |        |       |       |        |       |        |
| M     |       |        |       |       |        |       |        |
| illio |       |        |       |       |        |       |        |
| ns)** |       |        |       |       |        |       |        |
+-------+-------+--------+-------+-------+--------+-------+--------+
| **F   | ## F  | **FRM  | **    | **SR  | **SR   | **SR  | **T    |
| iscal | RM 30 | 15**   | ARM** | 30**  | 15**   | ARM** | otal** |
| Y     |       |        |       |       |        |       |        |
| ear** |       |        |       |       |        |       |        |
+-------+-------+--------+-------+-------+--------+-------+--------+
|       |       |        |       |       |        |       |        |
+-------+-------+--------+-------+-------+--------+-------+--------+
| 1978  | 0     |        |       |       |        |       | 0      |
+-------+-------+--------+-------+-------+--------+-------+--------+
| 1979  | 0     |        |       |       |        |       | 0      |
+-------+-------+--------+-------+-------+--------+-------+--------+
| 1980  | 0     |        |       |       |        |       | 0      |
+-------+-------+--------+-------+-------+--------+-------+--------+
| 1981  | 0     |        |       |       |        |       | 0      |
+-------+-------+--------+-------+-------+--------+-------+--------+
| 1982  | 0     |        |       |       |        |       | 0      |
+-------+-------+--------+-------+-------+--------+-------+--------+
| 1983  | 0     |        |       |       |        |       | 0      |
+-------+-------+--------+-------+-------+--------+-------+--------+
| 1984  | 0     |        |       | 0     |        |       | 0      |
+-------+-------+--------+-------+-------+--------+-------+--------+
| 1985  | 0     |        | 0     | 0     |        |       | 0      |
+-------+-------+--------+-------+-------+--------+-------+--------+
| 1986  | -1    |        | 0     | 0     |        |       | -1     |
+-------+-------+--------+-------+-------+--------+-------+--------+
| 1987  | -2    |        | 0     | 0     |        | 0     | -2     |
+-------+-------+--------+-------+-------+--------+-------+--------+
| 1988  | -1    |        | 0     | 0     |        | 0     | -1     |
+-------+-------+--------+-------+-------+--------+-------+--------+
| 1989  | -2    |        | 0     | 0     |        |       | -2     |
+-------+-------+--------+-------+-------+--------+-------+--------+
| 1990  | -2    |        | 0     | 0     |        |       | -2     |
+-------+-------+--------+-------+-------+--------+-------+--------+
| 1991  | -3    |        | 0     | 0     |        | 0     | -3     |
+-------+-------+--------+-------+-------+--------+-------+--------+
| 1992  | -2    | 0      | 0     | 0     | 0      | 0     | -3     |
+-------+-------+--------+-------+-------+--------+-------+--------+
| 1993  | -3    | 0      | 0     | -2    | 0      | 0     | -6     |
+-------+-------+--------+-------+-------+--------+-------+--------+
| 1994  | -5    | 0      | -1    | -3    | 0      | 0     | -9     |
+-------+-------+--------+-------+-------+--------+-------+--------+
| 1995  | -7    | 0      | -1    | 0     | 0      | 0     | -8     |
+-------+-------+--------+-------+-------+--------+-------+--------+
| 1996  | -13   | 0      | -2    | -1    | 0      | 0     | -16    |
+-------+-------+--------+-------+-------+--------+-------+--------+
| 1997  | -16   | 0      | -4    | 0     | 0      | 0     | -20    |
+-------+-------+--------+-------+-------+--------+-------+--------+
| 1998  | -27   | 0      | -3    | -3    | 0      | 0     | -34    |
+-------+-------+--------+-------+-------+--------+-------+--------+
| 1999  | -49   | 0      | -3    | -6    | 0      | -1    | -58    |
+-------+-------+--------+-------+-------+--------+-------+--------+
| 2000  | -56   | 0      | -8    | -1    | 0      | -1    | -66    |
+-------+-------+--------+-------+-------+--------+-------+--------+
| 2001  | -69   | 0      | -3    | -2    | 0      | -1    | -75    |
+-------+-------+--------+-------+-------+--------+-------+--------+
| 2002  | -98   | -1     | -13   | -2    | -1     | -6    | -121   |
+-------+-------+--------+-------+-------+--------+-------+--------+
| 2003  | -145  | -2     | -19   | 18    | -1     | -13   | -162   |
+-------+-------+--------+-------+-------+--------+-------+--------+
| 2004  | -205  | -2     | -39   | -1    | 0      | -18   | -265   |
+-------+-------+--------+-------+-------+--------+-------+--------+
| 2005  | -140  | -4     | -29   | 5     | 0      | -11   | -179   |
+-------+-------+--------+-------+-------+--------+-------+--------+
| 2006  | 33    | -2     | 1     | 7     | 0      | -1    | 38     |
+-------+-------+--------+-------+-------+--------+-------+--------+
| 20    | 841   | 11     | 20    | 49    | 3      | 1     | 924    |
| 07^b^ |       |        |       |       |        |       |        |
+-------+-------+--------+-------+-------+--------+-------+--------+
| **To  | 27    | -2     | -105  | 57    | 2      | -50   | -71    |
| tal** |       |        |       |       |        |       |        |
+-------+-------+--------+-------+-------+--------+-------+--------+

^a^ See Section IV for description of loans included in each loan type
category

^b^ Based on forecasted volume and composition distribution between the
second quarter of FY 2006 and the first quarter of FY 2007.

**2. Present Value of Future Cash Flows**

The present value of future cash flows of the MMI Fund is aggregated
from separate estimates of the present value of future cash flows from
each book of business and for each of the six major mortgage product
types. Exhibit III-3 shows the present values of future cash flows of
the mortgage product types from the FY 1978 through the FY 2007 books of
business. The present values are computed from the projected cash flows
occurring during FY 2008 and future years. This exhibit is offered to
facilitate comparison among books of business and mortgage types
according to cash flows that would not have been realized as of the end
of FY 2007. From Exhibit III-3, the total present value of future cash
flow is a negative \$3.952 billion dollars. Compared to the same number
estimated in the FY 2006 Review, this amount deteriorated by \$2.512
billion. This is a consequence of lower-than-expected house price growth
rates realized in FY 2007 and projected for FY 2008. The projected
negative house price growth rate during FY 2007 and FY 2008 suggests
that most mortgages originated during the past 2 years with high initial
loan to value ratios will probably lead to negative equity positions and
higher claim rates for their borrowers. Together with the high
concentration of loans with gift letters from non-profit organizations,
the FY 2006 and FY 2007 books may turn out to be the worst books of the
past 20 years. Exhibit III-3 indicates that, if the economy follows the
pattern of the Global Insight August 2007 forecast, both the FY 2006 and
FY 2007 books will experience negative cash flows, amounting to over
negative \$1.3 billion for each book over their remaining lives. In
fact, the overall economic values of these two books of business are
negative, meaning that insurance premium income is insufficient to cover
the claim losses.

Exhibit III-3

+-------+-------+-------+-------+-------+-------+-------+--------+
| ## Pr |       |       |       |       |       |       |        |
| esent |       |       |       |       |       |       |        |
|  Valu |       |       |       |       |       |       |        |
| e of  |       |       |       |       |       |       |        |
| Futur |       |       |       |       |       |       |        |
| e Cas |       |       |       |       |       |       |        |
| h Flo |       |       |       |       |       |       |        |
| ws as |       |       |       |       |       |       |        |
|  of t |       |       |       |       |       |       |        |
| he En |       |       |       |       |       |       |        |
| d of  |       |       |       |       |       |       |        |
| FY 20 |       |       |       |       |       |       |        |
| 07^a^ |       |       |       |       |       |       |        |
+=======+=======+=======+=======+=======+=======+=======+========+
| **by  |       |       |       |       |       |       |        |
| O     |       |       |       |       |       |       |        |
| rigin |       |       |       |       |       |       |        |
| ation |       |       |       |       |       |       |        |
| F     |       |       |       |       |       |       |        |
| iscal |       |       |       |       |       |       |        |
| Year  |       |       |       |       |       |       |        |
| &     |       |       |       |       |       |       |        |
| Mor   |       |       |       |       |       |       |        |
| tgage |       |       |       |       |       |       |        |
| Type  |       |       |       |       |       |       |        |
| (\$   |       |       |       |       |       |       |        |
| M     |       |       |       |       |       |       |        |
| illio |       |       |       |       |       |       |        |
| ns)** |       |       |       |       |       |       |        |
+-------+-------+-------+-------+-------+-------+-------+--------+
| **F   | **FRM | **FRM | **    | **SR  | **SR  | **SR  | **T    |
| iscal | 30**  | 15**  | ARM** | 30**  | 15**  | ARM** | otal** |
| Y     |       |       |       |       |       |       |        |
| ear** |       |       |       |       |       |       |        |
+-------+-------+-------+-------+-------+-------+-------+--------+
|       |       |       |       |       |       |       |        |
+-------+-------+-------+-------+-------+-------+-------+--------+
| 1978  | 0     |       |       |       |       |       | 0      |
+-------+-------+-------+-------+-------+-------+-------+--------+
| 1979  | 0     |       |       |       |       |       | 0      |
+-------+-------+-------+-------+-------+-------+-------+--------+
| 1980  | 0     |       |       |       |       |       | 0      |
+-------+-------+-------+-------+-------+-------+-------+--------+
| 1981  | 0     |       |       |       |       |       | 0      |
+-------+-------+-------+-------+-------+-------+-------+--------+
| 1982  | 0     |       |       |       |       |       | 0      |
+-------+-------+-------+-------+-------+-------+-------+--------+
| 1983  | 1     |       |       |       |       |       | 1      |
+-------+-------+-------+-------+-------+-------+-------+--------+
| 1984  | 0     |       |       | 0     |       |       | 0      |
+-------+-------+-------+-------+-------+-------+-------+--------+
| 1985  | -1    |       | 0     | 0     |       |       | -1     |
+-------+-------+-------+-------+-------+-------+-------+--------+
| 1986  | -1    |       | 0     | 0     |       |       | -1     |
+-------+-------+-------+-------+-------+-------+-------+--------+
| 1987  | -2    |       | 0     | 0     |       | 0     | -3     |
+-------+-------+-------+-------+-------+-------+-------+--------+
| 1988  | -2    |       | 0     | 0     |       | 0     | -2     |
+-------+-------+-------+-------+-------+-------+-------+--------+
| 1989  | -2    |       | 0     | 0     |       |       | -2     |
+-------+-------+-------+-------+-------+-------+-------+--------+
| 1990  | -3    |       | 0     | 0     |       |       | -3     |
+-------+-------+-------+-------+-------+-------+-------+--------+
| 1991  | -3    |       | 0     | 0     |       | 0     | -4     |
+-------+-------+-------+-------+-------+-------+-------+--------+
| 1992  | -3    |       | -1    | 0     |       | 0     | -4     |
+-------+-------+-------+-------+-------+-------+-------+--------+
| 1993  | -4    | 0     | -1    | -3    | 0     | 0     | -8     |
+-------+-------+-------+-------+-------+-------+-------+--------+
| 1994  | -7    | 0     | -2    | -4    | 0     | 0     | -12    |
+-------+-------+-------+-------+-------+-------+-------+--------+
| 1995  | -9    | 0     | -2    | 0     | 0     | 0     | -12    |
+-------+-------+-------+-------+-------+-------+-------+--------+
| 1996  | -20   | 0     | -3    | -1    | 0     | 0     | -24    |
+-------+-------+-------+-------+-------+-------+-------+--------+
| 1997  | -21   | 0     | -6    | 0     | 0     | 0     | -27    |
+-------+-------+-------+-------+-------+-------+-------+--------+
| 1998  | -43   | 0     | -4    | -3    | 0     | 0     | -50    |
+-------+-------+-------+-------+-------+-------+-------+--------+
| 1999  | -84   | 0     | -4    | -7    | 0     | 0     | -96    |
+-------+-------+-------+-------+-------+-------+-------+--------+
| 2000  | -80   | 0     | -11   | -1    | 0     | 0     | -92    |
+-------+-------+-------+-------+-------+-------+-------+--------+
| 2001  | -57   | -1    | -4    | 6     | 0     | 0     | -57    |
+-------+-------+-------+-------+-------+-------+-------+--------+
| 2002  | -72   | -1    | -24   | 17    | 0     | -5    | -86    |
+-------+-------+-------+-------+-------+-------+-------+--------+
| 2003  | -67   | -5    | -37   | 149   | -2    | -14   | 25     |
+-------+-------+-------+-------+-------+-------+-------+--------+
| 2004  | -211  | -5    | -77   | 60    | -1    | -27   | -262   |
+-------+-------+-------+-------+-------+-------+-------+--------+
| 2005  | -382  | -10   | -141  | 16    | 0     | -31   | -547   |
+-------+-------+-------+-------+-------+-------+-------+--------+
| 2006  | -     | -22   | -82   | -19   | 0     | -6    | -1,355 |
|       | 1,226 |       |       |       |       |       |        |
+-------+-------+-------+-------+-------+-------+-------+--------+
| 2007  | -     | -28   | -71   | -22   | 0     | -3    | -1,331 |
|       | 1,206 |       |       |       |       |       |        |
+-------+-------+-------+-------+-------+-------+-------+--------+
| **To  | -     | -71   | -469  | 185   | -4    | -87   | -3,952 |
| tal** | 3,505 |       |       |       |       |       |        |
+-------+-------+-------+-------+-------+-------+-------+--------+

^a^ Based on forecasted volume and composition distribution between the
second quarter of FY 2006 and the first quarter of FY 2007.

**3. Amortization of Current Books of Business**

In order to calculate the MMI Fund capital ratio, we also need to
estimate unamortized IIF. It is also instructive to consider the capital
ratio based on amortized IIF, on which basis the Government
Accountability Office (GAO) estimated the MMI Fund capital ratio in the
early 1990s. At any given time, the dollar value that is actually at
risk is the amortized IIF. Exhibit III-4 shows the total volume of new
mortgage originations for all types of mortgages for each year's book of
business, and the unamortized IIF and the amortized IIF, as of the end
of FY 2007.

As can be inferred from Exhibit III-4, the FY 2007 book of business
constitutes approximately 15.5 percent of the Fund\'s total unamortized
IIF. The FY 2003 book of business contributed the largest portion of
mortgage endorsement volume. Mortgage endorsements dropped significantly
following FY 2003. The five most recent books together represent over 73
percent of the total unamortized IIF of the current MMI Fund. Since the
FY 2003 book of business, which has the highest outstanding volume, has
already entered its projected peak claim period, the overall claim rate
of the MMI Fund is likely to remain relatively stable over the next few
years.

#  Exhibit III-4

  --------------------------------------------------------------------------
  **Endorsements and                                       
  Insurance-in-Force                                       
  of the MMI Fund**                                        
  -------------------- ----------------- ----------------- -----------------
  **As of End of FY                                        
  2007 (in \$                                              
  Millions)**                                              

  **Book of            **Mortgage        **Unamortized     **Amortized
  Business^a^**        Endorsements**    Insurance in      Insurance in
                                         Force^b^**        Force^b^**

                                                           

  1978                 10,028            267               15

  1979                 15,660            460               64

  1980                 14,875            242               56

  1981                 10,266            82                27

  1982                 7,317             19                9

  1983                 26,819            158               77

  1984                 15,931            347               195

  1985                 24,086            605               368

  1986                 57,747            2228              1,328

  1987                 70,230            3626              2,192

  1988                 37,433            1,602             1,056

  1989                 39,764            1,452             1,016

  1990                 47,127            1,550             1,121

  1991                 44,067            1,442             1,071

  1992                 45,093            1,884             1,405

  1993                 73,799            4,186             2,782

  1994                 79,692            6,217             4,148

  1995                 41,534            1,952             1,528

  1996                 61,696            3,423             2,724

  1997                 65,469            3,464             2,882

  1998                 88,593            6,932             5,855

  1999                 110,067           11,367            9,765

  2000                 86,804            5,200             4,689

  2001                 119,889           10,864            9,919

  2002                 128,891           20,736            19,012

  2003                 150,580           57,868            53,516

  2004                 92,894            46,787            44,097

  2005                 57,698            40,827            39,287

  2006                 50,105            45,055            44,151

  2007                 52,193^c^         51,451            51,094

  Total                1,726,349         332,293           305,449
  --------------------------------------------------------------------------

^a^ End of year insurance-in-force

^b^ Based on May 31, 2007 data extract from HUD and the performance of
outstanding loans projected by the econometric model for the last two
quarters of fiscal year 2007

^c^ Based on the FHA August 2007 projection.

B.  **Projected Future Economic Values and Capital Ratios**

In this section both the future economic values and the capital ratios
of the Fund are projected, based on HUD's forecast of endorsement
volumes and the cash flow projections based on the econometric and cash
flow models. The initial economic values of individual future books of
business are first projected, and then applied in estimating the
economic values and capital ratios of the entire MMI Fund.

**1. Present Values of Future Books**

The present values of future books discounted to the end of each
corresponding future fiscal year (through FY 2014) are tabulated in
Exhibit III-5. Notice that these values are greater than the projections
from the FY 2006 Review, reflecting the projection that the housing
economy moves out of the FY 2007 and FY 2008 slowdown. Another reason
for these more favorable values is FHA's ruling against endorsement of
loans with gift letters from seller-funded non-profit organizations.
Under the assumption that these high-claim-rate loans would rapidly
phase out during the next four quarters, the expected present values are
more favorable for FY 2009 and future books. Note that the total present
value for the FY 2009 book is more than double the FY 2008 book of
business. This is a result of the combination of moving out of the
housing recession and completely eliminating the high-claim-rate gift
loans.

# Exhibit III-5

+--------+--------+-------+-------+-------+--------+-------+-------+
| **P    |        |       |       |       |        |       |       |
| resent |        |       |       |       |        |       |       |
| Value  |        |       |       |       |        |       |       |
| of     |        |       |       |       |        |       |       |
| Future |        |       |       |       |        |       |       |
| Books  |        |       |       |       |        |       |       |
| of     |        |       |       |       |        |       |       |
| B      |        |       |       |       |        |       |       |
| usines |        |       |       |       |        |       |       |
| s^a^** |        |       |       |       |        |       |       |
+--------+--------+-------+-------+-------+--------+-------+-------+
| **by   |        |       |       |       |        |       |       |
| Origi  |        |       |       |       |        |       |       |
| nation |        |       |       |       |        |       |       |
| Year & |        |       |       |       |        |       |       |
| Mo     |        |       |       |       |        |       |       |
| rtgage |        |       |       |       |        |       |       |
| Type   |        |       |       |       |        |       |       |
| (in \$ |        |       |       |       |        |       |       |
| Mill   |        |       |       |       |        |       |       |
| ion)** |        |       |       |       |        |       |       |
+--------+--------+-------+-------+-------+--------+-------+-------+
| **Fi   | **FRM  | **FRM | **    | **SR  | **SR   | **SR  | **To  |
| scal** | 30**   | 15**  | ARM** | 30**  | 15**   | ARM** | tal** |
|        |        |       |       |       |        |       |       |
| **     |        |       |       |       |        |       |       |
| Year** |        |       |       |       |        |       |       |
+--------+--------+-------+-------+-------+--------+-------+-------+
| 2008   | 334    | -4    | -6    | 64    | 3      | 0     | 390   |
+--------+--------+-------+-------+-------+--------+-------+-------+
| 2009   | 740    | 3     | 8     | 94    | 4      | 1     | 849   |
+--------+--------+-------+-------+-------+--------+-------+-------+
| 2010   | 770    | 4     | 11    | 101   | 5      | 1     | 892   |
+--------+--------+-------+-------+-------+--------+-------+-------+
| 2011   | 806    | 3     | 11    | 109   | 5      | 1     | 936   |
+--------+--------+-------+-------+-------+--------+-------+-------+
| 2012   | 844    | 4     | 18    | 114   | 5      | 1     | 985   |
+--------+--------+-------+-------+-------+--------+-------+-------+
| 2013   | 1,003  | 5     | 22    | 130   | 6      | 1     | 1,167 |
+--------+--------+-------+-------+-------+--------+-------+-------+
| 2014   | 1,222  | 5     | 26    | 150   | 7      | 1     | 1,410 |
+--------+--------+-------+-------+-------+--------+-------+-------+

^a.^ Present values are estimated as of the end of each corresponding
fiscal years.

**2. Projected Future Economic Values and Capital Ratios**

Exhibit III-6 shows the projected capital ratios of the Fund using
amortized IIF. If amortized IIF were substituted for unamortized IIF,
the Fund\'s estimated capital ratios for FY 2007 and FY 2014 would be
6.97 percent and 7.96 percent, respectively. The slight improvement from
FY 2007 to FY 2014 is driven mainly by the forecast of the housing
market recovery after FY 2008. However, following the requirements
specified in NAHA, we continue to use the unamortized IIF measure in
calculating the capital ratio elsewhere in this Review.

# Exhibit III-6

+------+---------+--------+-----------+---------+----------+---------+
| **P  |         |        |           |         |          |         |
| roje |         |        |           |         |          |         |
| cted |         |        |           |         |          |         |
| MMI  |         |        |           |         |          |         |
| Fund |         |        |           |         |          |         |
| Per  |         |        |           |         |          |         |
| form |         |        |           |         |          |         |
| ance |         |        |           |         |          |         |
| for  |         |        |           |         |          |         |
| FY   |         |        |           |         |          |         |
| 2007 |         |        |           |         |          |         |
| to   |         |        |           |         |          |         |
| FY   |         |        |           |         |          |         |
| 2    |         |        |           |         |          |         |
| 014^ |         |        |           |         |          |         |
| a^** |         |        |           |         |          |         |
+======+=========+========+===========+=========+==========+=========+
| *    |         |        |           |         |          |         |
| *(\$ |         |        |           |         |          |         |
| Mil  |         |        |           |         |          |         |
| lion |         |        |           |         |          |         |
| s)** |         |        |           |         |          |         |
+------+---------+--------+-----------+---------+----------+---------+
| **Fi | **E     | **C    | **Volume  | **Amor  | **       | **Inv   |
| scal | conomic | apital | of New    | tized** | Economic | estment |
| Ye   | Value   | Ratio  | Endor     |         | Value of | E       |
| ar** | of the  | (%)**  | sements** | **In    | Each New | arnings |
|      | Fund**  |        |           | surance | Book of  | on Fund |
|      |         |        |           | in      | Bu       | Bal     |
|      |         |        |           | Force** | siness** | ances** |
+------+---------+--------+-----------+---------+----------+---------+
|      |         |        |           |         |          |         |
+------+---------+--------+-----------+---------+----------+---------+
|      |         |        |           |         |          |         |
+------+---------+--------+-----------+---------+----------+---------+
| 2007 | 21,277  | 6.97   | 52,193    | 305,449 | -406     | 　      |
+------+---------+--------+-----------+---------+----------+---------+
| 2008 | 22,748  | 7.26   | 50,149    | 313,313 | 390      | 1,082   |
+------+---------+--------+-----------+---------+----------+---------+
| 2009 | 24,706  | 7.44   | 58,381    | 331,980 | 849      | 1,108   |
+------+---------+--------+-----------+---------+----------+---------+
| 2010 | 26,796  | 7.49   | 65,658    | 357,981 | 892      | 1,199   |
+------+---------+--------+-----------+---------+----------+---------+
| 2011 | 29,053  | 7.50   | 72,556    | 387,249 | 936      | 1,321   |
+------+---------+--------+-----------+---------+----------+---------+
| 2012 | 31,492  | 7.56   | 77,773    | 416,717 | 985      | 1,454   |
+------+---------+--------+-----------+---------+----------+---------+
| 2013 | 34,251  | 7.68   | 86,237    | 445,854 | 1,167    | 1,592   |
+------+---------+--------+-----------+---------+----------+---------+
| 2014 | 37,405  | 7.96   | 92,439    | 470,024 | 1,410    | 1,744   |
+------+---------+--------+-----------+---------+----------+---------+

^a^ All values are as of the end of each fiscal year.

[^1]: The administrative expense was discontinued since the FY 2002
    Actuarial Review according to the federal credit reform requirement.
    The distributive share has been suspended since 1990. There is no
    indication that it would be resumed in the foreseeable future.