Yesterday, the House Financial Services Committee held a hearing entitled “Implementation of Higher FHA Loan Fees and Pending Legislative Proposals to Strengthen the FHA MMIF Fund and Improve Lender Oversight.” The only witness at the hearing was David H. Stevens, Assistant Secretary for Housing at the U.S. Department of Housing and Urban Development (HUD) and Commissioner of the Federal Housing Authority (FHA), who testified about steps FHA has taken toward strengthening its financial condition.
Ranking Member Spencer Bachus (R-AL) stated that continued weakness in the housing markets has “sparked great anxiety” in Congress about the viability of FHA. Last year, an independent auditor identified a 1.47% ($10.1 billion) shortfall in FHA’s legally required reserves as a proportion of total insurance-in-force. Yet, FHA has continued to expand its presence in mortgage transactions over the last three years, growing from a 3% to a 35% market share, totaling 6 million loans insured, as private lenders have scaled back participation amid continuing concerns about the economy and the housing markets. Arguing that government agencies are likely to continue heightened involvement in the mortgage sector while prospects for a complete economic recovery remain uncertain, Rep. Jeb Hensarling (R-TX) and other Committee members suggested that FHA may be at the center of the “next great American taxpayer bailout.”
Mr. Stevens disagreed, asserting that FHA’s net income increased the first three quarters of this year, in contrast to the independent actuaries’ prediction that a draw-down of $2.6 billion would be necessary to pay for rising claim expenses. When interest earnings are added to core insurance income, said Mr. Stevens, FHA’s capital resources have grown by $1.3 billion in fiscal year 2010. Acknowledging that “evolving” economic conditions require “continued vigilance,” Mr. Stevens maintained that FHS is “making progress” in establishing solid, independent standing.
Still, members expressed concerns that FHA’s market presence is “unsustainable” and ultimately unhealthy. Shelley Capito (D-WV) urged FHA to promote private lending and combat the creation of the “same kinds of moral hazard” that led to the “fraud and abuses” that precipitated the crisis in 2007 as a result of policy initiatives designed to sharply increase homeownership. Mr. Stevens agreed, testifying that government administrators “have learned that not everyone should own a home.” He further stated that FHA needs to “shrink its participation” in the home lending market but stressed that it must do so “in a balanced way” to avoid shocks that would likely occur from the void opened by a sudden exit. Mr. Stevens expressed hope that private lending will return in greater force as housing prices stabilize, though he was reluctant to speculate on the proximity of that event.
In the meantime, he said, FHA is working to strengthen loan quality and performance for future loans. To that end, FHA has followed through this year on proposals to (1) increase mortgage insurance premiums for program participants; (2) impose a formal limit on allowable credit scores; (3) institute higher down payments for borrowers with lower credit scores; (4) further tighten the minimum credit score for borrowers with low down payments; (5) reduce the maximum possible seller concession to match the industry norm and (6) implement a number of initiatives designed to “increase lender responsibility and enforcement.” Mr. Stevens credited these reforms with generating “tangible, measurable progress” in improving loan quality and performance over past years. Indeed, the independent auditor preparing FHA’s 2010 Actuary Report is projecting that no more than 29% of FHA’s losses will come from newly insured loans through 2015.
Chairman of the Committee’s Subcommittee on Oversight and Investigations Dennis Moore (D-KS) returned to the issue of fraud, seeking a description of actions FHA is taking to reduce losses. Mr. Stevens highlighted several measures, featuring the prosecution of improperly behaving institutions, of which 1,500 have been eliminated from FHA’s portfolio over the past year. FHA has also implemented a technology plan, through which it recently issued three contracts to develop tools to combat fraudulent action at the loan level.
Among other reforms, FHA established a permanent risk management office in July 2010 to expand its capacity to “assess financial and operational risk, perform more sophisticated data analysis, and respond to market developments.” Moving forward, Mr. Stevens said that he seeks continued collaboration with Congress to development meaningful housing reform including a comprehensive national policy that addresses both home ownership and rental housing in hopes of “providing people with the options they need to make good choices for their families.”