The Federal Housing Administration was battered by losses this year in its reverse mortgage program, reducing insurance reserves and casting doubt on plans to cut FHA premiums, according to a report on the housing agency's finances.

The FHA said Wednesday that its capital reserve ratio fell to 2.09% in fiscal 2017, down from 2.35% a year earlier, according to an annual independent actuarial report. The ratio measures reserves held in excess to cover projected losses. By law, the FHA must maintain a 2% capital reserve buffer.

The lower capital ratio bolsters arguments against cutting mortgage insurance premiums, which could give private mortgage insurers a reason to be hopeful. The Trump administration had suspended an earlier Obama-era proposal to reduce premiums, setting up a much-anticipated decision on whether to lower the cost for FHA insurance.

HUD Secretary Ben Carson
HUD had planned to cut annual premiums last year under the Obama administration, but Secretary Ben Carson delayed the decision, saying he wanted to study the issue further. Bloomberg News

The Department of Housing and Urban Development "is unlikely to revive the Obama administration plan to cut premiums," Jaret Seiberg, an analyst at Cowen & Co., wrote in a research note. "For private mortgage insurers, that is a positive as these firms compete with FHA for a subset of borrowers."

However, the fight over lowering FHA premiums may still be far from over as many in the housing and financial sectors continue to pressure the FHA to reduce premiums as a way to entice first-time buyers into the mortgage market.

The FHA's performance appeared to be dragged down by its reverse mortgage program.

The FHA has seen a greater volume of reverse mortgages, known as home equity conversion mortgages, or HECMs. But with the inherent riskiness of the product, higher interest rates and more seniors — who are typically reverse mortgage borrowers — going into default, FHA claims and losses have also risen.

Adolfo Marzol, a senior adviser to HUD Secretary Ben Carson, estimated that reverse mortgage claims are up 20% for the year, which had an impact on the capital ratio.

"A large percentage of HECMS are adjustable rates and as interest rates rise ... the negative amortization inherent in reverse mortgages increases, and that increases risk to the fund," Marzol said on a conference call with reporters.

HUD had planned to cut annual premiums last year under the Obama administration, but Carson delayed the decision, saying he wanted to study the issue further. Had the premium decrease gone into effect in January, the FHA's mutual mortgage insurance fund would have fallen to 1.76%, below the statutory requirement, said Dana Wade, general deputy assistant secretary for HUD's Office of Housing.

"Immediately upon taking office, the Trump Administration indefinitely suspended a scheduled reduction in FHA’s annual forward mortgage insurance premiums as the agency assessed the economic impact on the MMI Fund," the FHA said in a press release.

David Stevens, a former FHA commissioner who is president of the Mortgage Bankers Association, said the MBA did not call for reductions in mortgage insurance premiums last year because he did not want to see the capital ratio drop below 2%.

"It's clear that having the HECM program in the mortgage insurance fund is causing extreme volatility and the forward business is being held hostage by the reverse mortgage program," Stevens said.

Reverse mortgages were first included in the fund in 2009. Without reverse mortgages, the capital ratio would have been 3.3%.

The FHA insurance fund's net worth fell to $25.6 billion in fiscal year 2017, down from $27.6 billion a year earlier. The fund's cumulative "insurance-in-force" hit $1.23 trillion in fiscal year 2017.

The insurance fund supports the FHA’s single-family mortgage insurance programs, including all purchase and refinance transactions, as well as reverse mortgages.

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