Yesterday, the House Financial Services Committee's Subcommittee on Housing and Community Opportunity held a hearing entitled, “The Future of the Federal Housing Administration’s Capital Reserves: Assumptions, Predictions and Implications for Homebuyers.” Testifying before the Committee were:
- David Stevens, Assistant Secretary for Housing and Federal Housing Administration (FHA) Commissioner, U.S. Department of Housing and Urban Development
- Patrick Newport, U.S. Economist, IHS Global Insight
- Edward Pinto, Real Estate Financial Services Consultant
- Boyd Campbell, Member, Executive Board of the Maryland Association of Realtors, GSE Presidential Advisory Group, National Association of Realtors (NAR)
- David Kittle, Chairman, Mortgage Bankers Association (MBA)
- John L. Councilman, CMC, CRMS, Federal Housing Committee Chair, National Association of Mortgage Brokers (NAMB)
- Peter Bell, President, National Reverse Mortgage Lenders Association (NRMLA)
- Teresa Bryce, President, Radian Guaranty Inc. on behalf of the Mortgage Insurance Companies of America
Subcommittee Chair Maxine Waters (D-CA) began the hearing by noting that the FHA is a crucial tool to ensuring the recovery of the housing market and the country’s economic recovery. Several other members of the Subcommittee emphasized that the FHA has emerged as a major market participant in the current economic climate and has been an alternative to the sub-prime mortgage market. However, several members of the Subcommittee expressed concern about the FHA’s financial viability and hope that the testimony would discuss steps taken to ensure the FHA’s stability in the future.
Commissioner David Stevens clarified the FHA’s recent announcement that its capital reserve ratio is predicted to fall below the congressionally mandated threshold of two percent and discussed the steps being taken to ensure the FHA remains financially sound. He stated that the capital reserve ratio is predicted to fall below two percent because the “FHA expects higher net losses than previously estimated on outstanding loan guarantees, over the next thirty years and more than are currently reserved in the financing account.” According to Commissioner Stevens, this change, in combination with stresses accounted for in prior reviews, will drive the ratio below two percent. However, he noted that the capital reserve account is predicted to increase to above the two percent threshold, on its own, in two to three years and that the FHA has taken every step necessary to increase the ratio, including improving portfolio analysis and management, tightening the risk controls and overhauling the targeting and monitoring practices. He argued that these aggressive actions would help the capital reserve reach congressionally mandated levels and ensure that the FHA is able to keep the housing market viable.
Chairwoman Waters and other members of the Subcommittee acknowledged that while the FHA was undermined by sub-prime lenders, since the meltdown, the country has depended on the FHA to support the housing market. Chairwoman Waters noted the bi-partisan support for FHA and that, due to the quality of the FHA’s 2009 loans, taxpayers should not be concerned about an FHA bailout. Congressman Gene Green (D-TX) inquired about the steps being taken to ensure the FHA remains financially viable. Commissioner Stevens emphasized the steps the FHA has taken to update its focus on prudent risk management. On September 18, 2009, the FHA announced that it would appoint a Chief Risk Officer, who will oversee the coordination of risk management efforts into single division. Further, the FHA has appointed a new Deputy Assistant Secretary for Single Family Housing. Finally, on September 18, 2009, the FHA announced credit policy changes to strengthen the FHA’s risk management:
- Requirement that supervised mortgagees submit audited annual financial statements to the FHA.
- Modification of procedures to streamline refinance transactions.
- Requirement of appraiser independence in loan originations.
- Reduction of the FHA’s appraisal validity period to four months for all properties.
Mr. Newport provided his outlook for the U.S. housing market, with an emphasis on housing prices and tax credits for first-time homebuyers. He noted that, due in large part to a decline in long-term interest rates and the tax credit for first-time homebuyers, housing prices are stabilizing nationally and across the world. He said that the tax credit has stimulated demand, with about 1.6 million of the 3.9 million homes sold through mid-September to first-time homebuyers, and argued that once the tax credit expires, home prices will drop another 5%.
Mr. Pinto emphasized the growing fiscal crisis facing the FHA. He argued that the FHA appears destined for taxpayer bailout in the next 24-36 months, and cited several reasons to support his conclusion:
- FHA risks being adversely selected – the FHA and Veterans Administration (VA) account for over 90% of all the low-down-payment loans.
- FHA’s dollar volume has exploded – FHA and VA loans will constitute about 10% of all outstanding first mortgages by year end 2009.
- FHA is making much larger loans than it has in the past.
To avoid a FHA taxpayer bailout, he proposed raising the minimum FHA down payment on home purchase loans to 10%, limiting FHA’s volume of low-down-payment loans to a 5–10% market share, and reducing the FHA dollar limit to conform to its low- and moderate-income housing mission. In response to Mr. Pinto’s testimony, Chairwoman Waters further emphasized the quality of the FHA’s 2009 loans in relation to year’s past. Congresswoman Shelley Moore Capito (R-WV) inquired if the other witnesses testifying before the Subcommittee shared Mr. Pinto’s concerns. Although several witnesses stated they shared Mr. Pinto’s concerns to a lesser degree, especially in light of the rising unemployment rates, they continued to emphasize the positive efforts made by the FHA.
Both Mr. Campbell and Mr. Kittle emphasized the vital source of liquidity that the FHA has provided to the housing market. However, the NAR and MBA support similar changes to continue the availability of FHA loans to homeowners, including (1) supporting the “21st Century FHA Housing Act of 2009” which would increase funding to update FHA technology, (2) eliminating the owner-occupancy requirement for FHA condo mortgages, (3) making permanent the FHA loan limits currently in effect, and (4) extending and expanding the first-time homebuyer tax credit through 2010.
Mr. Councilman noted that while the NAMB applauded the actions taken by the FHA thus far, the NAMB believed there are immediate issues to be remedied, including updating the neighborhood watch early warning system, improving the Mortgagee Review Board process, increasing funding to improve FHA resources and permanently establishing FHA loan limits in high-cost areas at their current levels.
Mr. Bell testified that, while the FHA Home Equity Conversion Mortgage (HECM) will operate on a break-even or better basis, the adjustments to the program may greatly cost some seniors. He noted that the NRMLA understands and supports the need to operate the HECM program on a “negative credit subsidy basis,” but also believes that other options exist and would be less detrimental to senior homeowners, including adjusting mortgage insurance premiums (MIP) to generate more income for the FHA insurance fund. “HUD could generate the income the program needs to operate, while reducing upfront costs, by restructuring the MIP with a front-end amount and a higher ongoing MIP.”
Ms. Bryce argued that private mortgage insurance plays an important role in stabilizing the housing market, by enabling responsible borrowers to purchase homes with less than a 20% down payment. She also noted that the state-imposed reserve, capital and regulatory requirements have allowed mortgage insurers to continue to pay claims and write new business in the current economic climate. Ms. Bryce emphasized several features of private mortgage insurance that may improve the FHA’s financial health, including a coinsurance feature and the use of analytical and automated underwriting tools, to ensure the home is affordable and sustainable over the life of the mortgage.