Today, the Subcommittee on Housing and Community and Opportunity of the House Finance Services Committee held a hearing on a discussion draft of the FHA Reform Act of 2010. Testifying before the Subcommittee were:

Panel 1:

  • David Stevens, Assistant Secretary for Housing and Federal Housing Administration Commissioner, U.S. Department of Housing and Urban Development (HUD)

Panel 2:

  • Mike Anderson, President, Essential Mortgage and Vice Chair of Government Affairs, National Association of Mortgage Brokers
  • Graciela Aponte, Legislative Analyst, Wealth Building Policy Project, National Council of La Raza
  • Andrew Caplin, Professor of Economics and Co-Director of the Center for Experimental Social Science, New York University
  • John A. Courson, President and Chief Executive Officer, Mortgage Bankers Association (MBA)
  • Charles McMillan, President, National Association of Realtors
  • John Taylor, President and Chief Executive Officer, National Community Reinvestment Coalition (NCRC)
  • Mark Alston, First Vice President, Consolidated Board of Realtors on behalf of the National Association of Real Estate Brokers

Chairwoman Maxine Waters (D-CA) began the hearing by noting Congress’s desire to ensure FHA’s solvency but warned against legislation which would “overcorrect” the problem and result in FHA loans not being available to underrepresented borrowers. Ranking Member Shelley Capito (R-WV) agreed with the need to shore up the FHA insurance fund and applauded the steps taken by FHA toward reform such as increasing premiums and reducing seller concessions. Rep. Capito also commented on the Congressional Budget Office’s report of the shortfall in the amounts actually received from FHA insurance premiums from those it estimated it would receive.

Mr. Stevens began by reviewing the recent developments in homeownership—specifically the $900 billion increase in homeowner equity by the end of September 2009 and recent refinancing activity, which he estimated would save homeowners an average of $1,500 per year. He noted the importance of rebuilding FHA’s capital reserve account and argued that, while he did not think the decrease in the FHA’s capital reserve account was “the next subprime” requiring a taxpayer bailout, he did acknowledge that the account had decreased too quickly. He stated that the FHA’s independent actuary had concluded that the FHA capital reserve account would remain positive under all but the most catastrophic scenarios.

Mr. Stevens reviewed the reforms undertaken since his appointment as FHA commissioner. He noted that the FHA strengthened credit and risk controls and proposed a rule to increase net worth requirements for all FHA lenders. He also reported that FHA was working to increase staffing and technical capacity and upgrade its technology systems. Finally, he noted the increased activities by the FHA’s lender enforcement division to protect consumers by investigating 365 cases of lender misconduct, which had resulted in a withdrawal of approval for 354 lenders and a suspension of 6 lenders.

Mr. Stevens then reviewed the policy announcements by the FHA in January. These policy announcements taken to mitigate and augment the FHA’s mutual mortgage insurance fund’s capital reserves, including:

  • Increasing mortgage insurance premiums;
  • Imposing a firm floor on allowable credit scores; and
  • Further tightening the minimum credit score required for borrowers with low down payments.

Mr. Stevens reviewed activities taken to restructure mortgage insurance premiums. Mr. Stevens noted that the Department of Housing and Urban Development was increasing the upfront premium to 225 basis points, FHA was planning to reduce that premium by 100 basis points and offsetting that decrease by increasing the annual premium to 85 basis points for loans with loan-to-value ratios up to and including 95% and to 90 basis points for loan-to-value ratios above 95%.

Mr. Stevens noted that the FHA was also proposing a “two-step” FICO floor for FHA purchase borrowers, which would reduce the claim rate on new insurance as well as the loss rate experienced on those claims. Purchase borrowers with FICO scores of 580 and above would be required to make a minimum 3.5% down payment and those borrowers with FICO scores between 500 and 579 would be required to make a minimum down payment of 10%. Borrowers with FICO scores below 500 would be ineligible for insurance. Mr. Stevens argued against recent proposals to require a minimum 5% down payment for all transactions, because such a change would reduce the volume of loans endorsed by the FHA by more than 40% but would only contribute $500 million in additional budget receipts. Under questioning from Rep. Capito regarding FHA’s reluctance to mandate this minimum down payment, Mr. Stevens stated that FHA is not in the “layering of risk business,” and noted that down payment alone was not the only factor that influences loan performance. Rather, the combination of down payment and FICO is a much better indicator of loan performance.

Mr. Stevens also advocated a third policy measure – reducing the maximum permissible seller concession from its current 6% level to 3%. The current level exposed FHA to excess risk by creating incentives to inflate appraised value. Claim rates on high-concession loans were 50% higher or more than those on low-concession loans.

Mr. Anderson began his testimony by reviewing the reaction of the National Association of Mortgage Brokers (NAMB) to the proposed reforms in the FHA Reform Act. Regarding the proposed authorization to increase the annual mortgage premium insurance, Mr. Ander stated NAMB’s concern that the policy change would cause an increase in costs for FHA borrowers. While he understood the impact that the housing collapse and subsequent refinancing crisis has had on FHA’s capital reserves, he stated that increased mortgage costs would ultimately be passed on to consumers and, as a result, the number of borrowers qualifying for FHA loans would decrease. Mr. Anderson also reviewed the proposal to require all direct endorsement mortgage lenders to indemnify HUD for any loss on loans they originate. While NAMB supported requiring required indemnification for losses on loans originated outside of FHA guidelines, he noted that any indemnification requests should have due process and should be appealable. Finally, he reviewed the authority to terminate a mortgagee’s approval to originate or underwrite single-family mortgages should that mortgagee have an excessive rate of early defaults or claims. The termination process should have warnings, notice and appeal rights, not an automatic termination. Mr. Anderson reminded the Subcommittee of FHA’s primary mission to make loans to underserved borrowers, and that a mortgagee which fulfills this mission should not be penalized if these underserved borrowers ultimately default.

Dr. Caplin began his testimony by disagreeing with Mr. Stevens’s view that only a “catastrophic” fall in house prices would result in the FHA’s capital reserve account requiring a taxpayer-funded bailout. Mr. Caplin identified various deficiencies in the actuarial model used to evaluate bailout risk, and concluded the model had two primary flaws: (1) delinquency and modifications were ignored and (2) unemployment was inadequately captured. He also remarked on the poor history of the actuarial review, by noting that the 2009 review concluded than the 2008 review had underestimated losses, and that he expected a similar conclusion for the 2010 review.

Mr. Couron evaluated the proposed legislative changes by the FHA Reform Act. He stated that the MBA supported the proposed increase in the annual mortgage insurance premium. However, he opposed extending the indemnification requirements to all lenders, not merely those participating in the lender insurance program. While participants in the lender insurance program are able to endorse FHA mortgage loans without a pre-endorsement review, and are therefore willing to accept the additional risks of indemnification, by extending this requirement to all lenders, lenders would become even more cautious in underwriting loans and FHA’s action would therefore run counter to its mission.

Mr. McMillan spoke about the increase in mortgage insurance premiums. He agreed with earlier panelists that an increase would increase closing costs for borrowers. He stated that homeowners are already facing increased fees from appraisals and other closing services, and this would add to them. While he noted that FHA needed to replenish its capital account, he urged the FHA to use discretion to ensure that borrowers were not paying too high a fee. He also stated that the National Association of Realtors did not think that FICO scores were a perfect indicator of risk. He noted that certain underrepresented borrowers, specifically minorities, would be disadvantaged by the FICO score requirement. He concluded by applauding the FHA’s actions in oversight and enforcement and supported strengthening FHA’s ability to protect FHA borrowers and taxpayers.

Mr. Taylor began by supporting the reforms to the annual mortgage insurance premium. He stated that if FHA receives the authority in the FHA Reform Act, it would reduce the upfront premium charge and increase the annual charge. For borrowers with limited cash for closing, this would make the up-front premium affordable. Mr. Taylor supported creating a “menu of options” regarding the upfront and annual premium charges. He also supported the FHA’s FICO reforms, noting that given the data trends, FHA would be able to shore up its capital account reserves while still maintaining opportunities for borrowers under the FICO score reforms. He also supported indemnification by all lenders participating in the FHA program, stating that “all lenders participating in the FHA program should be on a level playing field and subject to sanctions.”

Mr. Alston supported the FICO credit score reform, noting that it was a useful tool in determining a willingness to pay and as a predictor of loan performance. A minimum 580 score was a generous threshold, according to Mr. Alston, because it permitted opportunities while still promoting sustainable home ownership. He said, however, that he had serious concerns with the mortgage insurance premium increase. He noted that he was instrumental in designing a pilot program for Fannie Mae to reduce the disparity between minority ownership and majority ownership. The program ended as a result of the increase in mortgage insurance rates from 0.5% to over 1.5%, and he was concerned this result could also occur under the FHA Reform Act.