**Section V: MMI Fund Sensitivities - Performance of the Fund under
Various Scenarios**

This section reports the results of the sensitivity analyses we
performed as part of FY 2005 Actuarial Review of the MMI Fund. To
understand the possible deviation of the economic values and capital
ratios of the MMI Fund with respect to the economic forecasts and some
key assumptions in the base scenario, several sensitivity analyses were
conducted and presented in this section. Although these scenario
analyses cannot describe all possible outcomes, they provide insights
into the relative importance and magnitude of the impact of each
selected factor on the performance of the MMI Fund. Among those
parameters and economic factors, one of the most critical factors is the
future economic condition that may prevail during the remaining life of
the FHA's currently existing portfolio. Essentially, the purpose of this
analysis is to test the sensitivity of the economic value of the MMI
fund in response to possible negative economic developments. The
selected scenarios are those we believe may have the most significant
impacts on the MMIF Fund's economic value. These sensitivity analyses
include:

-   Low house price appreciation

-   Low house price appreciation combined with higher interest rates

-   High claim loss severity rates

In the base-case scenario of the economic value of the MMI Fund, we used
quarterly economic forecast from Global Insight, Inc. The forecast
series include the national average sales price of existing
single-family homes, FHLMC 30-year fixed-rate mortgage commitment rates,
and 10-year and 3-month Treasury rates. Based on the 10-year and 3-month
rate forecasts, we then imputed the 1-year Treasury rate forecast. In
addition, we assumed that the future loss severity rate s would be
similar to the average rates observed between the FY 2000 through FY
2004 termination years, by loan type. Details of the methodology and
support for the selection of the assumed values of these economic
variables are described in Appendix D.

Exhibit V-1 displays the projected MMI Fund performance under the
base-case scenario. The current forecasted economic value of the MMI
Fund is \$21.621 billion and the estimated current capital ratio is 6.02
percent, which exceeds the NAHA mandated capital ratio of 2 percent. It
also shows the predicted economic values and capital ratios for the MMI
Fund from FY 2006 through FY 2012. The economic values and capital
ratios of the MMI Fund over FY 2005 through FY 2012 under alternative
scenarios are presented in Exhibits V-2 to V-4.

Exhibit V-1

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

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

  2005          21,621       6.02        58,264            358,871       570          

  2006          22,702       6.16        54,664            368,763       318          764

  2007          24,130       6.40        54,965            377,235       499          929

  2008          25,729       6.58        57,065            390,895       534          1,065

  2009          27,434       6.70        60,973            409,701       486          1,219

  2010          29,286       6.70        69,231            436,918       476          1,377

  2011          31,361       6.66        79,308            470,685       523          1,552

  2012          33,680       6.62        88,898            508,753       578          1,741
  ------------- ------------ ----------- ----------------- ------------- ------------ --------------

A. Low House Price Appreciation Scenario

The house price appreciation rate is the most important factor that
influences mortgage claim rates. Under the low house price appreciation
scenario, we investigated the impact of the MMI Fund performance by
assuming the house price appreciation rate is five percentage points
lower than the Global Insight, Inc. forecast for FY 2006 through FY
2008, returning to the baseline level starting at FY 2009. Compared to
the baseline scenario, Exhibit V-2 indicates that the economic value of
the MMI Fund could decrease by \$2.919 billion. The capital ratio of FY
2005 would be reduced to 5.21 percent. The impact lasts through FY 2012
and could reduce the FY 2012 capital ratio by as much as 1.62 percentage
points. This can be explained by the change in the level of claims due
to higher probabilities of negative equity as mortgage loans are faced
with a stressed housing economy.

Exhibit V-2

+--------+----------+--------+---------+---------+---------+---------+
| **Pro  |          |        |         |         |         |         |
| jected |          |        |         |         |         |         |
| MMI    |          |        |         |         |         |         |
| Fund   |          |        |         |         |         |         |
| Perfo  |          |        |         |         |         |         |
| rmance |          |        |         |         |         |         |
| with   |          |        |         |         |         |         |
| Low    |          |        |         |         |         |         |
| House  |          |        |         |         |         |         |
| Price  |          |        |         |         |         |         |
| Apprec |          |        |         |         |         |         |
| iation |          |        |         |         |         |         |
| Scen   |          |        |         |         |         |         |
| ario** |          |        |         |         |         |         |
|        |          |        |         |         |         |         |
| **(\$  |          |        |         |         |         |         |
| Milli  |          |        |         |         |         |         |
| ons)** |          |        |         |         |         |         |
+--------+----------+--------+---------+---------+---------+---------+
| **     | **       | **C    | *       | **In    | **E     | **Inv   |
| Fiscal | Economic | apital | *Volume | surance | conomic | estment |
| Year** | Value of | Ratio  | of New  | in      | Value   | Return  |
|        | the      | (%)**  | E       | Force** | of New  | on Fund |
|        | Fund**   |        | ndorse- |         | Book of | Bal     |
|        |          |        | ments** |         | Bus     | ances** |
|        |          |        |         |         | iness** |         |
+--------+----------+--------+---------+---------+---------+---------+
| 2005   | 18,702   | 5.21   | 58,264  | 358,871 | -884    |         |
+--------+----------+--------+---------+---------+---------+---------+
| 2006   | 17,985   | 4.87   | 54,664  | 369,430 | -1,377  | 661     |
+--------+----------+--------+---------+---------+---------+---------+
| 2007   | 18,205   | 4.80   | 54,965  | 379,340 | -516    | 736     |
+--------+----------+--------+---------+---------+---------+---------+
| 2008   | 19,222   | 4.88   | 57,065  | 393,820 | 213     | 803     |
+--------+----------+--------+---------+---------+---------+---------+
| 2009   | 20,619   | 4.99   | 60,973  | 413,563 | 486     | 911     |
+--------+----------+--------+---------+---------+---------+---------+
| 2010   | 22,129   | 5.01   | 69,231  | 441,687 | 476     | 1,035   |
+--------+----------+--------+---------+---------+---------+---------+
| 2011   | 23,824   | 5.00   | 79,308  | 476,041 | 523     | 1,173   |
+--------+----------+--------+---------+---------+---------+---------+
| 2012   | 25,725   | 5.00   | 88,898  | 514,336 | 578     | 1,323   |
+--------+----------+--------+---------+---------+---------+---------+

B. Low House Price Appreciation Combined with Higher Interest Rates
Scenario

In this scenario, the house price appreciation rates were assumed to be
five percentage points below that of the Global Insight forecast for FY
2006 through FY 2008. In addition, we assumed an interest rate shock of
300 basis points higher than the Global Insight forecast between FY 2006
and FY 2008, and then returned to the baseline levels in FY 2009. The
compound effect of both interest rates and house prices are imposed on
the MMI Fund made this one of the most severe stress scenario in this
Review.

From the previous scenario, it is clear that lower house price growth
would lead to a higher claim rate. The high interest rate scenario
interacts with the low house price growth rate in the following way. As
the interest rate goes up, prepayment rates go down. As fewer loans are
prepaid, more loans would remain in the Fund and are therefore subject
to the risk of claim. Even if the conditional claim rate does not
increase, the cumulative claim rate would increase, causing the lifetime
claim loss to increase.

Exhibit V-3 displays the results from this scenario. Holding the low
growth rate on house price constant (by referring to the results above),
the impact of higher interest rates is primarily driven by higher
lifetime claim experiences and higher IIF in future years due to slower
prepayments. This scenario forces the FY 2005 capital ratio of the MMI
Fund to an even lower level. The capital ratio for FY 2005 dropped by
0.20 percentage points from the base case scenario and for FY 2012
dropped by 1.96 percentage points. However, the capital ratio still
remains above NAHA's mandated 2.00 percent level through FY 2012.

Exhibit V --3

  -------------- ------------ ----------- ----------------- ------------- ------------ --------------
  Projected MMI                                                                        
  Fund                                                                                 
  Performance                                                                          
  under Low                                                                            
  House Price                                                                          
  Appreciation                                                                         
  Combined with                                                                        
  High Interest                                                                        
  Rates Scenario                                                                       
  (\$ Millions)                                                                        

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

  2005           20,886       5.82        58,264            358,871       -281         

  2006           19,761       5.22        54,664            378,543       -2,490       1,364

  2007           17,880       4.41        54,965            405,428       -3,282       1,402

  2008           16,824       3.89        57,065            432,986       -2,382       1,325

  2009           18,107       4.13        60,973            438,675       486          797

  2010           19,492       4.42        69,231            441,261       476          909

  2011           21,048       4.57        79,308            460,208       523          1,033

  2012           22,796       4.66        88,898            489,166       579          1,169
  -------------- ------------ ----------- ----------------- ------------- ------------ --------------

C. High Claim Loss Severity Rates Scenario

The loss severity rate is defined as the portion of the unpaid principal
of a claimed loan that is not recovered through the disposition of the
foreclosed property. This scenario test is of critical importance
because losses on claims comprise the largest expense to the MMI Fund.
Although in recent years, the loss rate on FHA claim cases has shown a
general trend of decreasing from its historical level, the loans
terminated in FY 2004 experienced loss severity rate higher than those
of the previous three years. In the base-case scenario, we assumed that
the loss severity rate will be similar to the average level of the FY
2000-FY 2004 period. However, there exists the possibility that the loss
severity rate could rise substantially above recent year's experiences.
This potential high loss severity scenario is designed to investigate
the impact if loss rates start rising again. In particular, the loss
rate is assumed to be five percentage points higher than those of the
base case for each of the product types for all future years.

The high level of loss severity produces lower economic values and
capital ratios for FY 2005 through FY 2012 as shown in Exhibit V-4. An
increase in the loss severity rate by 5 percentage points would decrease
the FY 2012 capital ratio by 0.80 percentage points, but still remaining
above the 2.00 percent level required by the NAHA.

**Exhibit V-**4

+--------+----------+--------+---------+---------+---------+--------+
| **Pro  |          |        |         |         |         |        |
| jected |          |        |         |         |         |        |
| MMI    |          |        |         |         |         |        |
| Fund   |          |        |         |         |         |        |
| Perfo  |          |        |         |         |         |        |
| rmance |          |        |         |         |         |        |
| with   |          |        |         |         |         |        |
| High   |          |        |         |         |         |        |
| Claim  |          |        |         |         |         |        |
| Loss   |          |        |         |         |         |        |
| 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   | Return |
|        | the      | (%)**  | E       | Force** | of New  | on     |
|        | Fund**   |        | ndorse- |         | Book of | Fund   |
|        |          |        | ments** |         | Bus     | Bala   |
|        |          |        |         |         | iness** | nces** |
+--------+----------+--------+---------+---------+---------+--------+
| 2005   | 20,351   | 5.67   | 58,264  | 358,871 | 318     |        |
+--------+----------+--------+---------+---------+---------+--------+
| 2006   | 21,129   | 5.73   | 54,664  | 368,763 | 59      | 719    |
+--------+----------+--------+---------+---------+---------+--------+
| 2007   | 22,254   | 5.90   | 54,965  | 377,235 | 260     | 865    |
+--------+----------+--------+---------+---------+---------+--------+
| 2008   | 23,525   | 6.02   | 57,065  | 390,895 | 289     | 982    |
+--------+----------+--------+---------+---------+---------+--------+
| 2009   | 24,860   | 6.07   | 60,973  | 409,701 | 221     | 1,115  |
+--------+----------+--------+---------+---------+---------+--------+
| 2010   | 26,284   | 6.02   | 69,231  | 436,918 | 176     | 1,248  |
+--------+----------+--------+---------+---------+---------+--------+
| 2011   | 27,860   | 5.92   | 79,308  | 470,685 | 184     | 1,393  |
+--------+----------+--------+---------+---------+---------+--------+
| 2012   | 29,605   | 5.82   | 88,898  | 508,753 | 197     | 1,547  |
+--------+----------+--------+---------+---------+---------+--------+

D. Summary

Exhibit V-5 reports the projected MMI Fund's capital ratio correspond to
the selected alterative scenarios: base-case, low house price
appreciation, low house price appreciation and high interest rates, and
high loss severity. In all five scenarios, the estimated capital ratios
exceed the NAHA mandated capital ratio of 2.0 percent for all future
fiscal years.

**Exhibit V-**5

  -----------------------------------------------------------------------------------
  **Projected                                                          
  MMI Fund's                                                           
  Capital Ratio                                                        
  between                                                              
  Scenarios                                                            
  (%)**                                                                
  ------------- --------------- ---------------- --------------------- --------------
  **Fiscal      **Base-case**   **Low House      **Low House Price     **High Loss
  Year**                        Price            Appreciation Combined Claim Severity
                                Appreciation**   with High Interest    Rate**
                                                 Rates**               

  2005          6.02            5.21             5.82                  5.67

  2006          6.16            4.87             5.22                  5.73

  2007          6.40            4.80             4.41                  5.90

  2008          6.58            4.88             3.89                  6.02

  2009          6.70            4.99             4.13                  6.07

  2010          6.70            5.01             4.42                  6.02

  2011          6.66            5.00             4.57                  5.92

  2012          6.62            5.00             4.66                  5.82
  -----------------------------------------------------------------------------------

However, potential risks faced by future books of business are revealed
by these sensitivity analyses. The initial economic value and the
initial capital ratio of several future books of business could become
negative if any one of these three alternative economic scenarios
becomes reality. This is mainly a result of the rising concentration of
the new books of business in the loans with downpayment assistance from
non-relative sourced gift, which experienced claim rates significantly
higher than the traditional FHA business. HUD should consider conducting
thorough research regarding its current premium structure and the
ongoing trend of its business concentration to avoid further
deterioration of the quality of its future books of business.