**Section V: MMI Fund Sensitivities - Performance under Alternative
Scenarios**

This section reports the results of the sensitivity analyses we
performed as part of the FY 2008 Actuarial Review of the MMI Fund. This
year, the MMI Fund was severely tested with the current economic
environment, and it passed the NAHA-mandated 2 percent minimum capital
ratio requirement under the base-case projections. To understand the
possible deviations of the economic values and capital ratios of the MMI
Fund with respect to the base-case economic forecasts, several
sensitivity analyses were conducted and are presented in this section.
While these scenario analyses do not describe all possible outcomes,
they do provide insights into the relative importance and magnitude of
the impact of each selected factor on the performance of the MMI Fund.
Among these parameters and economic factors, one of the most critical
factors is the future economic conditions that may prevail during the
remaining life of FHA's currently existing portfolio. Essentially, the
purpose of these analyses is to test the sensitivity of the economic
value of the MMI Fund in response to possible alternative economic
developments. The selected scenarios are those we believe to be relevant
in considering possible impacts on the MMI Fund's economic value. These
sensitivity analyses include

-   Extended housing recession

-   Higher interest rates

-   Higher claim loss-severity rates

-   Continued endorsement of loans with downpayment assistance from
    non-profit organizations

-   Less pessimistic economic scenario

We used the July 2008 quarterly economic forecasts from Global Insight,
Inc. for our base-case actuarial analysis. The forecasted series include
the OFHEO national house price index, Freddie Mac 30-year fixed-rate
mortgage commitment rate, and 10-year and 1‑year Treasury rates. In
addition, as discussed in Section II, we assumed that future
loss-severity rates would be similar to the level of loss severity
experienced for FY 2006 claim terminations, by loan type, judicial
foreclosure requirements, and whether downpayment gifts from non-profit
organizations were received. Details of the methodology and support for
the selection of the assumed values of these economic variables are
provided in Appendix D.

Exhibit V-1 replicates the projected MMI Fund performance under the
base-case scenario shown in Exhibit II-1. Under the base-case scenario,
the current forecasted economic value of the MMI Fund is \$12.908
billion and the estimated current capital ratio is 3.00 percent and the
projected capital ratio for FY 2015 is 2.90 percent, both of which
exceed the NAHA-mandated capital ratio of 2 percent. Exhibit V-1 also
shows the predicted economic values and capital ratios for the MMI Fund
from FY 2009 through FY 2015. The economic values and capital ratios of
the MMI Fund over FY 2008 through FY 2015 under alternative scenarios
are presented in Exhibits V-2 to V-6.

Exhibit V-1

  ------------- ------------ ----------- ----------------- ------------- ------------ --------------
  **Projected                                                                         
  MMI Fund                                                                            
  Performance                                                                         
  for the                                                                             
  Base-Case                                                                           
  Scenario (\$                                                                        
  Millions)**                                                                         

  **Fiscal      **Economic   **Capital   **Volume of New   **Insurance   **Economic   **Investment
  Year**        Value of the Ratio (%)** Endorse-ments**   in Force**    Value of     Earnings on
                Fund**                                                   Each New     Fund
                                                                         Book of      Balances**
                                                                         Business**   

  2008          12,908       3.00        154,240           429,634       -3,643       　

  2009          15,823       2.52        280,404           626,968       2,384        532

  2010          20,491       2.30        331,092           891,329       3,999        669

  2011          26,597       2.28        357,002           1,165,450     5,192        914

  2012          33,807       2.39        364,405           1,416,798     5,957        1,254

  2013          41,179       2.53        359,606           1,626,564     5,710        1,662

  2014          49,030       2.71        364,344           1,809,316     5,810        2,041

  2015          57,512       2.90        382,138           1,981,451     6,055        2,427
  ------------- ------------ ----------- ----------------- ------------- ------------ --------------

A. Extended Housing Recession

The house price appreciation rate is the most important economic factor
influencing mortgage insurance claim rates. Under the extended housing
recession scenario, we investigated the impact on the MMI Fund
performance by assuming that the FY 2008 housing recession forecasted by
Global Insight, Inc. will last for one more year through FY 2009 -- and
then return to the baseline forecast level starting in FY 2010. In other
words, the FY 2009 house price appreciation is projected at negative
9.14 percent, compared to the base-case scenario value of negative 0.96
percent. Also recall that the FY 2008 house price appreciation is
negative 9.14 percent for both the base scenario and this alternative
scenario. The two consecutive years of deflating house prices in this
alternative scenario are both in excess of negative 9 percent, and the
cumulative house price appreciation in this scenario over FY 2008,
FY 2009, and FY 2010 is in excess of negative 18 percent, near
depression levels, while in the base case it is about negative 11
percent over these three years. This is a very stressful scenario.

Exhibit V-2 indicates that, compared to the baseline scenario, the
economic value of the FY 2008 MMI Fund would decrease by \$3.133 billion
from its base-case value, and the capital ratio for FY 2008 would be
reduced to 2.28 percent. The impact lasts through FY 2015 and would
reduce the FY 2015 capital ratio by as much as 0.45 percentage points.
The most significant result of this scenario is that the capital ratio
falls below the NAHA-mandated 2 percent level in FY 2009 through
FY 2012, reaching as low as 1.45 percent in FY 2009.

**Exhibit V-2**

+--------+----------+--------+---------+---------+---------+---------+
| **Pro  |          |        |         |         |         |         |
| jected |          |        |         |         |         |         |
| MMI    |          |        |         |         |         |         |
| Fund   |          |        |         |         |         |         |
| Perfo  |          |        |         |         |         |         |
| rmance |          |        |         |         |         |         |
| with   |          |        |         |         |         |         |
| Ex     |          |        |         |         |         |         |
| tended |          |        |         |         |         |         |
| H      |          |        |         |         |         |         |
| ousing |          |        |         |         |         |         |
| Rec    |          |        |         |         |         |         |
| ession |          |        |         |         |         |         |
| Scen   |          |        |         |         |         |         |
| ario** |          |        |         |         |         |         |
|        |          |        |         |         |         |         |
| **(\$  |          |        |         |         |         |         |
| Milli  |          |        |         |         |         |         |
| ons)** |          |        |         |         |         |         |
+--------+----------+--------+---------+---------+---------+---------+
| **     | **       | **C    | *       | **In    | **E     | **Inv   |
| Fiscal | Economic | apital | *Volume | surance | conomic | estment |
| Year** | Value of | Ratio  | of New  | in      | Value   | E       |
|        | the      | (%)**  | E       | Force** | of Each | arnings |
|        | Fund**   |        | ndorse- |         | New     | on Fund |
|        |          |        | ments** |         | Book of | Bal     |
|        |          |        |         |         | Bus     | ances** |
|        |          |        |         |         | iness** |         |
+--------+----------+--------+---------+---------+---------+---------+
| 2008   | 9,775    | 2.28   | 154,240 | 429,618 | -5,000  | 　      |
+--------+----------+--------+---------+---------+---------+---------+
| 2009   | 9,123    | 1.45   | 280,404 | 627,970 | -1,055  | 403     |
+--------+----------+--------+---------+---------+---------+---------+
| 2010   | 13,508   | 1.51   | 331,092 | 894,406 | 3,999   | 386     |
+--------+----------+--------+---------+---------+---------+---------+
| 2011   | 19,302   | 1.65   | 357,002 | 1,      | 5,191   | 603     |
|        |          |        |         | 168,941 |         |         |
+--------+----------+--------+---------+---------+---------+---------+
| 2012   | 26,169   | 1.84   | 364,405 | 1,      | 5,957   | 910     |
|        |          |        |         | 419,941 |         |         |
+--------+----------+--------+---------+---------+---------+---------+
| 2013   | 33,165   | 2.03   | 359,606 | 1,      | 5,710   | 1,287   |
|        |          |        |         | 629,969 |         |         |
+--------+----------+--------+---------+---------+---------+---------+
| 2014   | 40,618   | 2.24   | 364,344 | 1,      | 5,810   | 1,644   |
|        |          |        |         | 813,557 |         |         |
+--------+----------+--------+---------+---------+---------+---------+
| 2015   | 48,684   | 2.45   | 382,138 | 1,      | 6,055   | 2,011   |
|        |          |        |         | 987,243 |         |         |
+--------+----------+--------+---------+---------+---------+---------+

B. Higher Interest Rates

In this scenario, we assumed an interest rate shock of 300 basis points
higher than the Global Insight, Inc. forecast for FY 2009 through
FY 2011, and then rates are assumed to return to the baseline levels in
FY 2012. As interest rates go up, prepayment rates go down. As fewer
loans are prepaid, more loans remain in the Fund and are therefore
subject to the risk of claim. Even where the conditional claim rate does
not increase, the cumulative claim rate increases, causing the lifetime
claim loss to increase.

Exhibit V-3 displays the results from this scenario. The impact of
higher interest rates is mainly on the higher IIF in future years due to
slower prepayment rates. For existing books with low interest rates, the
below market rates provide borrowers the incentive to avoid defaults
even when there is negative equity in the house, thereby yielding lower
claim rates. The capital ratio also increases by 1.10 percentage points
over the base-case projection.

On the other hand, the next three books of business from FY 2009 through
FY 2011 will be originated with higher initial interest rates. When the
rate drops suddenly in FY 2012, most good-quality loans would be
refinanced, while remaining borrowers are unable to refinance,
presumably due to lower credit quality or the lack of borrower equity.
This adverse-selection effect shows strongly in the negative economic
values of the books over FY 2009 to FY 2011.

As a result, the capital ratio for FY 2009 falls to 2.03 percent and the
FY 2015 capital ratio of the MMI Fund falls to 1.89 percent. Except for
FY 2008 and FY 2009, the capital ratio drops below the NAHA-mandated
2.00 percent level from FY 2010 through FY 2015. In particular the
capital ratio for FY 2011 drops as low as 0.48 percent.

Exhibit V--3

  ------------- ------------ ----------- ----------------- ------------- ------------ --------------
  Projected MMI                                                                       
  Fund                                                                                
  Performance                                                                         
  under Higher                                                                        
  Interest                                                                            
  Rates (\$                                                                           
  Millions)                                                                           

  **Fiscal      **Economic   **Capital   **Volume of New   **Insurance   **Economic   **Investment
  Year**        Value of the Ratio (%)** Endorse-ments**   in Force**    Value of     Earnings on
                Fund**                                                   Each New     Fund
                                                                         Book of      Balances**
                                                                         Business**   

  2008          17,596       4.10        154,240           429,618       -1,846       　

  2009          13,411       2.03        280,404           660,491       -4,910       725

  2010          9,669        1.03        331,092           942,653       -4,309       567

  2011          5,945        0.48        357,002           1,227,779     -4,156       431

  2012          12,214       0.88        364,405           1,388,894     5,989        280

  2013          18,524       1.25        359,606           1,476,936     5,710        601

  2014          25,252       1.59        364,344           1,589,815     5,810        918

  2015          32,555       1.89        382,138           1,726,397     6,055        1,250
  ------------- ------------ ----------- ----------------- ------------- ------------ --------------

C. Higher Loss-Severity Rates Scenario

The loss-severity rate is defined as the percentage of the unpaid
principal of a claimed loan that is not recovered through the
disposition of the foreclosed property. Under the higher loss-severity
scenario, loss-severity rates are assumed to be 5 percentage points
higher than under the baseline scenario for each of the product types
for all future years. Such an occurrence would be of critical importance
because losses on claims comprise the largest expense item of the MMI
Fund. In the base-case scenario, we assumed that the loss-severity rate
will be similar to the level of the FY 2006 experience. In FY 2007 the
reported loss rate was lower than in FY 2006, but in FY 2007 many
claimed loans were not yet closed and thus not yet included in the
loss-rate statistics. This phenomenon will also be likely during the
depressed housing market of FY 2008. Due to the forecasted weakening of
the housing market, there exists the possibility that the loss-severity
rate could exceed the FY 2006 experience. This potentially higher
loss-severity rate scenario is designed to investigate the impact if
loss rates rise further.

The higher level of loss-severity rates produces lower economic values
and capital ratios for FY 2008 through FY 2015 as shown in Exhibit V-4.
An increase in the loss-severity rate by 5 percentage points would
decrease the capital ratio for FY 2008 to 1.97 percent and the FY 2015
capital ratio to 1.83 percent. For the entire seven-year forecasting
period, the projected capital ratio is under the 2.00 percent level
required by NAHA.

**Exhibit V-4**

+--------+----------+--------+---------+---------+---------+--------+
| **Pro  |          |        |         |         |         |        |
| jected |          |        |         |         |         |        |
| MMI    |          |        |         |         |         |        |
| Fund   |          |        |         |         |         |        |
| Perfo  |          |        |         |         |         |        |
| rmance |          |        |         |         |         |        |
| with   |          |        |         |         |         |        |
| Higher |          |        |         |         |         |        |
| L      |          |        |         |         |         |        |
| oss-Se |          |        |         |         |         |        |
| verity |          |        |         |         |         |        |
| R      |          |        |         |         |         |        |
| ates** |          |        |         |         |         |        |
|        |          |        |         |         |         |        |
| **(\$  |          |        |         |         |         |        |
| Milli  |          |        |         |         |         |        |
| ons)** |          |        |         |         |         |        |
+--------+----------+--------+---------+---------+---------+--------+
| **     | **       | **C    | *       | **In    | **E     | **Inve |
| Fiscal | Economic | apital | *Volume | surance | conomic | stment |
| Year** | Value of | Ratio  | of New  | in      | Value   | Ea     |
|        | the      | (%)**  | E       | Force** | of Each | rnings |
|        | Fund**   |        | ndorse- |         | New     | on     |
|        |          |        | ments** |         | Book of | Fund   |
|        |          |        |         |         | Bus     | Bala   |
|        |          |        |         |         | iness** | nces** |
+--------+----------+--------+---------+---------+---------+--------+
| 2008   | 8,448    | 1.97   | 154,240 | 429,811 | -7,727  | 　     |
+--------+----------+--------+---------+---------+---------+--------+
| 2009   | 9,415    | 1.50   | 280,404 | 627,599 | 619     | 348    |
+--------+----------+--------+---------+---------+---------+--------+
| 2010   | 11,885   | 1.33   | 331,092 | 892,515 | 2,071   | 398    |
+--------+----------+--------+---------+---------+---------+--------+
| 2011   | 15,772   | 1.35   | 357,002 | 1,      | 3,358   | 530    |
|        |          |        |         | 167,624 |         |        |
+--------+----------+--------+---------+---------+---------+--------+
| 2012   | 20,703   | 1.46   | 364,405 | 1,      | 4,188   | 743    |
|        |          |        |         | 420,898 |         |        |
+--------+----------+--------+---------+---------+---------+--------+
| 2013   | 25,665   | 1.57   | 359,606 | 1,      | 3,944   | 1,018  |
|        |          |        |         | 633,372 |         |        |
+--------+----------+--------+---------+---------+---------+--------+
| 2014   | 30,960   | 1.70   | 364,344 | 1,      | 4,023   | 1,272  |
|        |          |        |         | 819,665 |         |        |
+--------+----------+--------+---------+---------+---------+--------+
| 2015   | 36,649   | 1.83   | 382,138 | 1,      | 4,156   | 1,533  |
|        |          |        |         | 997,674 |         |        |
+--------+----------+--------+---------+---------+---------+--------+

D. Continued Endorsement of Loans with Downpayment Assistance from
Non-Profit Organizations

Loans with downpayment assistance from non-profit organizations produced
claim rates significantly higher than traditional FHA business.
Furthermore, the recently enacted HERA terminates seller-financed
downpayment assistance effective October 1, 2008. In the base-case
scenario, we assumed that these rulings will be effectively enforced,
eliminating loans that receive downpayment assistance from seller-funded
non-profit organizations starting October 1, 2008. Our alternative
scenario shows the situation of the Fund if these loans still account
for 10 percent of the future books of business. The results are shown in
Exhibit V-5. Under this alternative scenario, there is no impact on the
FY 2008 economic value and capital ratio, but all future books show
significantly lower economic values so that the capital ratio falls
below 2 percent in FY 2010 and barely recovers to above 2 percent in FY
2015.

**Exhibit V-5**

  ------------- ------------ ----------- ----------------- ------------- ------------ --------------
  **Projected                                                                         
  MMI Fund                                                                            
  Performance                                                                         
  with                                                                                
  Continued                                                                           
  Endorsement                                                                         
  of Loans with                                                                       
  Downpayment                                                                         
  Assistance                                                                          
  (\$                                                                                 
  Millions)**                                                                         

  **Fiscal      **Economic   **Capital   **Volume of New   **Insurance   **Economic   **Investment
  Year**        Value of the Ratio (%)** Endorse-ments**   in Force**    Value of     Earnings on
                Fund**                                                   Each New     Fund
                                                                         Book of      Balances**
                                                                         Business**   

  2008          12,908       3.00        154,240           429,634       -3,643       　

  2009          13,867       2.21        280,404           627,035       428          532

  2010          16,271       1.83        331,092           891,074       1,818        586

  2011          20,190       1.73        357,002           1,163,811     3,193        726

  2012          25,208       1.78        364,405           1,413,266     4,066        952

  2013          30,290       1.87        359,606           1,620,739     3,843        1,239

  2014          35,732       1.98        364,344           1,800,954     3,941        1,501

  2015          41,607       2.11        382,138           1,970,590     4,106        1,769
  ------------- ------------ ----------- ----------------- ------------- ------------ --------------

E.  Less Pessimistic Economic Scenario

Typically, scenario analyses portray more adverse conditions than the
base case. However, given the severe house price forecast in the base
case, it is appropriate to show the results of a less pessimistic
economic scenario. This scenario takes the most recently realized OFHEO
house price appreciation rate during the second quarter of FY 2008, of
negative 1.44 percent, and repeats it for four subsequent quarters
through the second quarter of FY 2009. Under this less pessimistic
economic scenario, the FY 2008 house price appreciation rate will be
about negative 5 percent, instead of the negative 9 percent forecasted
in July 2008 by Global Insight, Inc. Exhibit V-6 indicates that,
compared to the baseline scenario, the economic value of the FY 2008 MMI
Fund would increase by \$2.680 billion from its base-case value, and the
capital ratio for FY 2008 would increase to 3.64 percent, and the FY
2015 capital ratio would increase from 2.90 percent to 3.10 percent.

Exhibit V-6

+---------+----------+--------+---------+---------+---------+---------+
| **Pr    |          |        |         |         |         |         |
| ojected |          |        |         |         |         |         |
| MMI     |          |        |         |         |         |         |
| Fund    |          |        |         |         |         |         |
| Perf    |          |        |         |         |         |         |
| ormance |          |        |         |         |         |         |
| for the |          |        |         |         |         |         |
| Less    |          |        |         |         |         |         |
| Pess    |          |        |         |         |         |         |
| imistic |          |        |         |         |         |         |
| S       |          |        |         |         |         |         |
| cenario |          |        |         |         |         |         |
| (\$     |          |        |         |         |         |         |
| Mill    |          |        |         |         |         |         |
| ions)** |          |        |         |         |         |         |
|         |          |        |         |         |         |         |
| **Mill  |          |        |         |         |         |         |
| ions)** |          |        |         |         |         |         |
+---------+----------+--------+---------+---------+---------+---------+
| *       | **       | **C    | *       | **In    | **E     | **Inv   |
| *Fiscal | Economic | apital | *Volume | surance | conomic | estment |
| Year**  | Value of | Ratio  | of New  | in      | Value   | E       |
|         | the      | (%)**  | E       | Force** | of Each | arnings |
|         | Fund**   |        | ndorse- |         | New     | on Fund |
|         |          |        | ments** |         | Book of | Bal     |
|         |          |        |         |         | Bus     | ances** |
|         |          |        |         |         | iness** |         |
+---------+----------+--------+---------+---------+---------+---------+
| 2008    | 15,588   | 3.64   | 154,240 | 428,817 | -2,849  | 　      |
+---------+----------+--------+---------+---------+---------+---------+
| 2009    | 18,691   | 3.00   | 280,404 | 624,017 | 2,459   | 643     |
+---------+----------+--------+---------+---------+---------+---------+
| 2010    | 23,480   | 2.64   | 331,092 | 888,192 | 3,999   | 790     |
+---------+----------+--------+---------+---------+---------+---------+
| 2011    | 29,718   | 2.56   | 357,002 | 1,      | 5,191   | 1,047   |
|         |          |        |         | 162,319 |         |         |
+---------+----------+--------+---------+---------+---------+---------+
| 2012    | 37,076   | 2.62   | 364,405 | 1,      | 5,957   | 1,401   |
|         |          |        |         | 413,993 |         |         |
+---------+----------+--------+---------+---------+---------+---------+
| 2013    | 44,608   | 2.75   | 359,606 | 1,      | 5,710   | 1,823   |
|         |          |        |         | 623,919 |         |         |
+---------+----------+--------+---------+---------+---------+---------+
| 2014    | 52,629   | 2.91   | 364,344 | 1,      | 5,810   | 2,211   |
|         |          |        |         | 806,355 |         |         |
+---------+----------+--------+---------+---------+---------+---------+
| 2015    | 61,289   | 3.10   | 382,138 | 1,      | 6,055   | 2,605   |
|         |          |        |         | 978,260 |         |         |
+---------+----------+--------+---------+---------+---------+---------+

F. Summary

Exhibit V-7 reports the projected MMI Fund's capital ratio corresponding
to the selected scenarios: (1) base-case, (2) extended housing
recession, (3) higher interest rates, (4) high loss severity, (5)
continued endorsement of downpayment assistance loans, and (6) the less
pessimistic economic scenario. For the four adverse scenarios, there are
23 instances out of a total of 32 where the capital ratio falls below 2
percent. The lowest capital ratio is 0.48 percent for FY 2011 in the
higher interest rate scenario.

It is clear from these scenario analyses that the MMI Fund's soundness
depends critically on the future course of the economy and how FHA is
able to avoid exposure to non-profit organization-funded downpayment
assistance loans. Exhibit V-7 highlights the several outcomes where the
capital ratio is less than the NAHA-mandated 2 percent: in all scenarios
that are more pessimistic than the base case, the ratio would fall below
2 percent (but, it should be pointed out, do not fall below zero). The
conclusion is that if future conditions are worse than assumed in this
year's Review, the capital ratio of the MMI fund will likely fall below
the 2‑percent floor. Nevertheless, in all of these alternative
scenarios, the economic value of the MMI Fund remains positive
throughout the next seven years.

**Exhibit V-7**

  ------------- --------------- ------------- ---------- ---------- ------------- -------------
  **Projected                                                                     
  MMI Fund\'s                                                                     
  Capital Ratio                                                                   
  by Scenario                                                                     
  (%)**                                                                           

  **Fiscal      **Base-Case**   **Extended    **Higher   **Higher   **Continued   **Less
  Year**                        Housing       Interest   Claim Loss Downpayment   Pessimistic
                                Recession**   Rates**    Severity   Assistance    Economic
                                                         Rate**     Loans**       Scenario**

  2008          3.00            2.28          4.10       **1.97**   3.00          3.64

  2009          2.52            **1.45**      2.03       **1.50**   2.21          3.00

  2010          2.30            **1.51**      **1.03**   **1.33**   **1.83**      2.64

  2011          2.28            **1.65**      **0.48**   **1.35**   **1.73**      2.56

  2012          2.39            **1.84**      **0.88**   **1.46**   **1.78**      2.62

  2013          2.53            2.03          **1.25**   **1.57**   **1.87**      2.75

  2014          2.71            2.24          **1.59**   **1.70**   **1.98**      2.91

  2015          2.90            2.45          **1.89**   **1.83**   2.11          3.10
  ------------- --------------- ------------- ---------- ---------- ------------- -------------