On Wednesday the
House Financial Services Committee held a second in a scheduled series of hearings to look
into the financial condition of the Federal Housing Administration (FHA). The sole witness at the hearing titled "Bailout, Bust, or Much Ado about Nothing?: A Look at the
Federal Housing Administration's 2012 Actuarial Report" was Carol Galante,
Assist Secretary of the Department of Housing and Urban Development and Acting
Galante briefly recounted the
history of the housing collapse, FHA's response to that event, and its role in
the current state of housing recovery which, according to Moody's Analytics,
prevented house prices from falling an additional 25 percent resulting in 3 million more job losses
a reduction of economic output of $500 billion.
It has also continued to service its historic target population,
insuring 1.2 million single family mortgages worth $213 billion in 2012, 79
percent of which were for first-time buyers and accounting for 50 percent of
home purchase mortgages for
African American borrowers and nearly as many for Hispanic and Latino households.
FHA's market share, however is declining as the economy recovers and private capital returns to the market. New endorsements
in 2012 continued to decline from the peak
levels of 2009.
Its market share of refinance and purchase transactions was 14.6 percent in 2012 but the dollar
volume was the lowest since the start of
crisis and is now at 2002-2003 levels;
more indicative of the
reduction in the size of
market than of abnormal levels of
Home Equity Conversion Mortgage (HECM) insurance endorsements in FY 2012 were also down by
25 percent from FY 2011 levels, to 54,591 loans, the third consecutive year HECM volume declined.
that FHA's contribution has
not been without stress. An independent actuarial review conducted
by Integrated Financial
and released in November 2012 measures the economic net worth of FHA's portfolio at the end of the fiscal year and found it had a capital reserve ratio of a negative 1.44 percent, and the Fund's
stands at negative $16.3 billion.
FHA's Mutual Mortgage Insurance (MMI)
Fund operates with two primary
sets of financial accounts:
a Financing Account, which reflects the business transactions related to insurance operations,
a Capital Reserve Account, which
reflects secondary reserves to cover
program costs, including higher claim expenses, or
lower fee collections.
Reserve Account was established to
assist in managing to the two-percent capital ratio requirement enacted by Congress
1990. Under what is called "permanent indefinite budget authority" FHA
has access to the U.S. Treasury for any
funds needed to pay claim obligations.
The Fund is
subject to two distinct portfolio valuations
each year which project all
future revenues and expenses based
upon a forecast of loan performance under defined economic conditions. One
is performed by an independent actuary the other is
subsidy re-estimate performed by the Administration and
published in the President's Budget.
Loans originated from 2007-2009 continue to be the prime
source of stress to the Fund,
with fully $70 billion in claims attributable to these books of
but the actuary attests to the high quality and profitability of books
insured since 2010. Thus,
even though books of business insured since 2010 are the
strongest in agency history, there is
still work to be done in mitigating the impact of older
findings regarding the economic net worth of the fund is of serious concern
but it will not determine whether FHA will
need to draw on permanent and indefinite budget authority from the Treasury, Galante said. The President's budget will outline the
Administration's expectation about such assistance and the ultimate need will be borne out in the actual
performance of the FHA
single family program and the steps FHA takes
to increase revenue or reduce losses.
budget submission last year anticipated a Treasury draw of nearly $700 million
but at the end of
2012 the Capital Reserve Account held $3.3
billion because of policy changes
that substantially improved the value of
Fund. Likewise, the series of additional
has announced are
designed to reduce the likelihood that FHA will need Treasury assistance at the end of FY
Galante said the actuarial assessments
estimate that the economic value of the Fund as of the end of
2012 is negative $16.3 billion against an active portfolio of
value of the forward portfolio was estimated at negative $13.5 billion,
HECM portfolio at negative $2.8 billion. These economic values
represent capital reserve ratios of
negative 1.28 percent and negative 3.58 percent respectively. The actuary projects that the MMI Fund capital
reserve ratio will be positive by FY 2014 and reach
2.0 percent during FY 2017 assuming no changes
policy or other actions by FHA. Policy
that were announced when the actuarial report was
released are expected to accelerate
time to the Fund's
The low capital ratio today anticipates
that the current pool of insured loans still has
significant foreclosure and claim activity yet to occur. Projected losses for 2007-2009 vintage loans alone total $70 billion in claims.
Loans with seller-funded down payment assistance have been
particularly costly to the Fund and are projected
to cost $15 billion
more through their elevated
claim rates. In fact the Actuary estimates that had
FHA had not insured any seller-funded-downpayment loans, the net economic value of
MMI Fund would be positive
$1.77 billion today. Congress eliminated seller-
funded down payment loans in 2008.
The loan endorsements in fiscal
years 2010 through 2012 are
expected to produce significant net revenues that will partially offset losses from older loans. The contrast in quality between these pre-
post-2009 loans is based,
least in part, on the impact of key policy changes which
have added over
billion to the Fund since 2009.
FHA has taken to
significant actions to date to improve the health and trajectory of the MMI
Fund, Galante said. The changes to FHA policy since 2009 are projected
to have improved the economic value of the Fund by at least $20 billion.
A first step was to improve FHA's monitoring and oversight of
lenders including substantial improvements to risk analysis and policy changes
to focus on high risk areas. As a result record numbers of
lenders have been withdrawn from FHA
there were substantial improvements in lender compliance,
a number of settlements with lenders
for violations of
FHA has also taken recent steps to increase oversight of lender
FHA has also worked to strengthen its credit policies, implementing Congress's
elimination of seller-funded
down payment assistance programs
and enacting increased down payment requirements for borrowers with credit scores below 580. FHA
has also proposed regulations to reduce the amount of
that increase risks from inflated appraisals,
required manual underwriting
for borrowers with credit scores below 620 and debt to income (DTI) ratios over 43 percent,
made enhancements to FHA's TOTAL Scorecard,
increase in the required down
borrowers seeking loans in excess of $625,500.
Galante said that, while it was a difficult choice, FHA has increased mortgage insurance premiums
five times since 2009. The most recent increase in response to the FY 2012 actuarial
an average $150 to borrowers' annual
costs but the combined increases have yielded more than $10 billion
to the Fund.
FHA has also
taken steps to control
costs and limit losses through
its REO disposition processes
loss mitigation strategies. Better oversight of REO contractors
compliance monitoring along
with measures to promote competition and continuity have reduced the gap between appraised values
and REO sales prices
62% and the time in inventory has
fallen by 45%.
Last year FHA implemented a
significant expansion of its program to sell non-performing loans in pools via auction to investors.
The Distressed Asset Stabilization Program (DASP)
expands the number of loans
sold in each sale and
introduces innovations to promote stability in hard hit areas. The initial results from the first DASP sale
were positive and the Actuary estimated
more than $1 billion in improved economic value from
this initiative over the next two years.
FHA is implementing a series of additional actions to continue improving the Fund's
trajectory over both the short and long term which are projected to provide billions of economic value for
MMI Fund in FY 2013.
- Throughout the
past fiscal year, FHA has
ramping up alternatives to foreclosure. These alternatives, primarily short sales, comprised
of total dispositions since 2010, with
average loss severities about 20% lower than from
REO. DASP and other actions have had a
measurable effect, as loss severities
have already fallen by 9% in the last year.
- FHA has redesigned its standards for
modifications, repayment plans, and other mitigation products, gearing them towards
greater payment relief for borrowers. This should result in more sustainable payment outcomes
for borrowers over the long term.
- FHA will introduce a
sale policy removing certain barriers for obtaining a short sale.
This change is expected to increase the number of defaulted loans resulting in short sales rather than foreclosures
which provide significant savings to the Fund.
- FHA plans to expand a Claim without Conveyance pilot program for FHA-insured loans that have
been foreclosed. Lenders can offer the properties for sale at a reserve price slightly below the outstanding unpaid principal
balance of the loan
with the aim of selling them to a third party without after conveying the title
to FHA and eliminating some FHA carrying costs.
- Beginning in 2013, FHA
a large-scale proactive marketing campaign to
make more borrowers aware of and able to take advantage of
loan modification opportunities, while reducing foreclosures and decreasing associated losses for FHA. FHA will also pursue more creative strategies to dispose of REO properties in
geographies where traditional asset
disposition methods yield net negative recoveries for FHA.
Galante said it is also vital
to take additional
strengthen new books
of business to ensure the long term health of the MMI Fund.
Accordingly, in the second quarter
of FY 2013,
FHA will implement the following policies for
no longer cancel mortgage insurance
premiums (MIPs) on loans for
which the outstanding
principal balance reaches less than
of the original
principal balance while continuing 100 percent coverage. It is estimated that $10 billion in revenues
will be lost in the 2010-2012 vintages
as a result of
current cancellation policy and that 10%-12% of all
claims losses may
occur after MIP cancellation.
FHA will increase annual
mortgage insurance premiums
an additional 10 basis points.
This premium increase, $13 per month for the average FHA borrower, which FHA
to implement in 2013 will add significant revenue to the Fund and ensure that
FHA does not take on additional market share while
not affecting borrower
access to credit or threatening
the emerging housing recovery.
FHA intends to develop new policies which
incentivize, or in some cases require, borrowers to complete a pre-purchase housing
prior to the purchase of
a home using
that changes in borrower
utilization of the HECM program and the FY 2012 actuarial review show substantial stress
the HECM program. Under
its current regulatory authority
over FHA has limited ability to address root-cause issues
and will, therefore, be forced to make blunt changes to the program on an interim basis. FHA
will take immediate action to ensure that HECM consumers
better protected and able to sustain their reverse mortgage while also protecting the Fund.
In administrative guidance dated
January 30, 2013,
the Fixed Rate Standard program with the Fixed Rate HECM Saver product, which
will result in a reduction of
maximum amount of
funds available to a
Recently larger numbers of estate executors of HECM borrowers have been
choosing to convey these properties
FHA rather than sell them, adding costs and reducing
recoveries for FHA. By incentivizing the sale of
properties by executors,
FHA is able to avoid
property management, maintenance,
marketing costs associated with the REO
disposition process, thereby reducing losses to the Fund on these properties.
Over a longer
term, either through the granting of the legislative authority described below or via the much longer rule making process, FHA will
also pursue other material
changes to ensure the long-term viability of the HECM program including: limiting the draw at origination to mandatory obligations (i.e. closing costs, mortgage
federal debt); performing a financial
a basis for loan approval and
determining the suitability
of various HECM products
protect consumers from acquiring loans not fit for their
situation; and establishing a
tax and insurance set-aside to ensure an
ability to pay taxes and insurance on the mortgaged property.
Galante said FHA needed
Congressional help to increase its ability to hold lenders accountable for non-compliance with FHA policy and provide greater
flexibility for the
agency to make changes as emerging needs and trends are identified and avoid unnecessary losses
before they occur. Congressional approval is needed, she said,
for the following:
- Indemnification Authority for Direct Endorsement Lenders: This
provision, which FHA
has been seeking since 2010, would allow FHA to seek indemnification from Direct Endorsement
lenders which represent 70% of
FHA approved lenders rather than only from lenders with Lender
Insurance (LI) approval.
- Revised Indemnification Authority: This change would eliminate the "knew or should have known" standard with regard to fraud or misrepresentation.
While the GSEs require lenders to retain all fraud related risk,
FHA only holds lenders accountable
for fraudulent activity if they "knew or
should have known" of its occurrence. Providing proof limits
ability to hold lenders accountable for fraud, and a change would significantly improve FHA's
ability to avoid losses related to fraud.
- Authority to Terminate
Origination and Underwriting Approval: FHA needs enhanced ability to review lender
in terminating the approval of an
originate or underwrite single family mortgages.
has been seeking this authority since 2010.
- Revised Compare Ratio Requirement: This
would revise the statute governing the
Termination Initiative allowing the Secretary to compare rates
of early defaults and claims
insured single family mortgage
loans among lenders on any basis the Secretary determines
appropriate, such as geographic
standards, or populations served and to implement such comparisons
regulations, notice, or
Mortgagee Letter. This will
to obtain meaningful comparisons of lenders in varying market conditions, providing greater clarity for lenders and a more refined understanding of
- Authority to Transfer Servicing: In order to facilitate more effective loss mitigation,
this change would give FHA
authority to require poorly performing servicers to transfer
individual loans to another servicer with better performance results.