David H. Stevens,
President & CEO of the Mortgage Bankers Association (MBA), and Gary Thomas,
President of the National Association of Realtors® (NAR) testified today before
the U.S. Senate Committee on Banking, Housing and Urban Affairs at a hearing
titled, "Addressing FHA's Financial Condition and Program Challenges."
Stevens, who served as FHA Commissioner from 2009 to 2111 noted
findings from FHA's 2012 Actuarial Review that the capital ratio of the MMI
Fund had fallen to negative 1.44 percent which prompted concerns that it might
need a draw from the U.S. Treasury and raised questions about whether FHA's
policies need to be adjusted.
findings Steven's said do not mean that FHA has insufficient cash to pay insurance
claims, a current operating deficit, or will
need to immediately draw funds from Treasury; only the President's FY2014 budget can make
that determination. It is not surprising
that FHA is experiencing
significant losses on
loans made during the recent crisis, as
well as losses
on the large volume of its new business.
FHA's financial position
to whether the assumptions and
predictions behind the Actuarial Review hold
industry is cautiously optimistic about FHA's recent programmatic changes, MBA recognizes the severity of the losses stemming from
the 2007-2009 books of business are so great, and the
uncertainty in forecasting economic trends is so high, that the
possibility of a further decline in
the capital ratio must be
acknowledged as well as that other key variables such as the future
paths of home
prices and interest rates, can significantly sway the estimate of Fund
Stevens said FHA has already raised insurance premiums, increased
and taken other steps to address many of the causes that have led to losses in
its single-family portfolio. The credit
profile and performance of the 2010 to 2012 portfolios demonstrate the effects
of these changes.
MBA believes further
programmatic changes at FHA must balance three priorities: restoring financial
solvency; preserving FHA's critical housing mission; and maintaining the
agency's countercyclical role. The
Association plans to release a white paper next month that looks at various
policy options to determine their impact on FHA.
- Limit excessive risk
layering. Risk-based underwriting or
specifying additional underwriting criteria or compensating factors within
certain credit boundaries, could further reduce FHA's credit risk, but overly
tight credit controls could mitigate against FHD's traditional borrowers. FHA must find the right balance. Locking in some of the overlays employed by
lenders would protect FHA from any erosion in standards as market conditions
requirement from 3.5 percent to 5 percent. FHA
already increased minimum downpayments for
a credit score below 580 to 10 percent and has proposed raising the minimum for borrowers with
loans above $625,500 to five percent. FHA
continue this trend by designing
a tiered downpayment structure based on credit
scores where borrowers with the greatest risk of defaulting
would be required
to pay higher
borrowers with better credit scores.
- Establish a credit score
floor of 620. FHA recently
began requiring that borrowers with credit scores below that score have their
loans manually underwritten to ensure adequate compensating factors. Establishing an absolute credit score floor would reflect the current market
standard of private lenders, making FHA less subject to
adverse selection. Borrowers with extremely weak
credit may be better served by credit counseling
and a slower path to homeownership, rather
than an immediate and costlier loan.
downside risk is that a minimum score of 620 could reduce
options for many borrowers
especially penalizing some with a one-time
credit damaging life event. Eliminating FHA as an option for
credit-impaired borrowers might make the market fertile ground for a new subprime
market and/or predatory lending.
- Requiring two month reserves
and tightening DTI requirements for all
borrowers would prepare homeowners to absorb major household
expenses and would
positively impact FHA's default rate. Moreover, this would be another way to verify if borrowers are truly financially prepared for the
cost of homeownership. The changes however would also delay homebuying for borrowers who
need to accumulate additional cash for a downpayment.
FHA high-cost loan limit of $729,750 is due to expire at the end of the year
and will then match the current GSE limit of $625,500. Stevens said this will
help return FHA's focus to serving low-to-moderate income and first-time
borrowers. MBA data indicates that less
than one percent of FHA-insured loans are
between $625,500 and $729,750 anyway and it appears that as demand for larger loans grows,
the need will
be adequately served by the private sector.
On the other hand, larger loans
tend to perform better compared
similar smaller loans, and,
as borrowers are already charged an additional 25
basis points for these loans, they actually improve
the MMI Fund and
provide additional revenue. Given
that loans above
comprise a small percentage
FHA's portfolio, but have significant positive
attributes, policymakers may consider extending the limits until
the MMI Fund is financially stable.
Also, in recent
years, FHA has increased its enforcement of agency-approved lenders which
Stevens said, when warranted, is certainly the right thing to do for the fund.
However, given current market conditions, FHA must take a balanced approach to
enforcement to guard against further credit tightening.
MBA supports high standards for all FHA lenders in
order to protect the agency's viability, the
lender's reputation, and the reputation of the industry. There must, however, be a reasonable
margin for human error, especially when the
error is not
the cause of the delinquency or default. MBA would staunchly oppose
efforts that allow FHA to go beyond
reasonable standards of lender enforcement.
Stevens also suggested some of
the recent regulatory changes will affect FHA. The new definition of Qualified
Mortgage establishes a safe harbor for lenders and Stevens said MBA strongly believes that for the foreseeable future lenders will
be extremely wary of originating
loans that fall outside
the QM safe harbor. Consequently, if the
is not at least expanded, the
availability of FHA credit for underserved populations - first-time, minority,
and low- and
borrowers - may be
unduly limited, jeopardizing FHA's ability to fulfill
Dodd-Frank risk retention rule as currently drafted would
require families to make a
20 percent downpayment and
meet relatively low
other stringent requirements. The proposed QRM definition
appears to conflict directly with
to shrink FHA from its current role of financing one-third of all mortgages and
one-half of all purchase mortgages because it
would make it far more difficult for private capital to re-enter the housing
finance market. The wide
disparity between FHA's downpayment
requirement of 3.5 percent and the QRM requirement of 20 percent would force over-utilization of FHA
and other government programs.
Thomas told the Senators that, without the FHA, the housing downturn
and economic recession would have been far worse for the nation. "FHA
helped fill the void over the past five years after private lending fled the
market by providing safe, affordable access to mortgage credit to millions of
Americans who wanted to purchase a home. Had FHA not stepped in to fill the market gap,
many families would have been unable to purchase homes, current homeowners
would have experienced far greater drops in equity and their home's value,
and our nation's economy would be much further from a recovery."
Thomas said that FHA has always been a staple in home financing; never
offering risky products, using predatory lending practices, or engaging in
exotic underwriting. Yet, like all
lenders, it incurred great financial losses as a result of overall market conditions
that led to millions of foreclosures.
NAR is confident, Thomas said, that FHA has already taken many of the
necessary steps to stabilize the fund as well as numerous administrative
changes to mitigate risk. "FHA currently has one of the strongest books on
record and the quality of borrowers has skyrocketed; continued market
improvements and rising home prices will also help improve the fund's future
financial condition," he said.
He cautioned about making arbitrary changes to FHA, such as further
increasing costs to consumers or limiting the use of the program to certain
types of buyers, only for the sake of luring back private markets. Any actions designed to deliberately lower
FHA's market share could disrupt the availability and affordability of mortgage
credit and undermine the fragile real estate recovery, he said.
NAR welcomes a time when FHA's market share is reduced to its more
traditional levels of 10 to 15 percent of the market, and the private lending
market is once again robust, Thomas said, but we are not there yet. "Uncertainty
about pending financial regulations and the future of the secondary mortgage
market are keeping private lenders from returning to mortgage markets.
"Once the rules for mortgage finance are resolved and housing prices
stabilize nationwide we anticipate that private investors will return to the market
and FHA's market share will return to more traditional levels."