During the first day of a scheduled two-day hearing on proposed housing legislation sponsored by Committee Chairman Barney Frank, Federal Housing Administration (FHA) Commissioner Brian D. Montgomery testified before the House Financial Services Commission.
While most of his remarks centered on the proposed expansion of an existing loan insurance program called FHASecure and specifics of the new housing bill, Commissioner Montgomery did speak to the financial constraints facing his agency.
As reported by The New York Times earlier in the week, the agency is confronted with the possibility of the first deficit in its 74 year history primarily because of a single program in which sellers, with the assistance of one of several non-profit organizations, fund the buyer's downpayment. This amount is then usually added to the purchase price of the home. Loans funded under this program have suffered high delinquency and foreclosure rates, draining FHA's budget.
In his prepared remarks, Commissioner Montgomery asked Congress to maintain FHA's ability to maintain its mortgage insurance premium structure commensurate with the risk of the loans it insures. Unfortunately he said, neither the House or the Senate versions of the proposed legislation allows such flexibility in pricing and the solvency of the FHA without federal appropriations for its credit subsidy cost may be placed in doubt as early as the beginning of the next fiscal year.
He also called for an outright prohibition on down payment assistance from sellers or any other persons or entity that stands to benefit from the transaction financially. He said that data clearly demonstrates that FHA loans made to borrowers with seller-funded downpayment assistance go to foreclosure at three times the rate of other loans. 'We simply cannot sustain this business,' he said. 'We want FHA to be here not just for this generation but for generations to come.'
Montgomery called for passage of the FHA Modernization legislation but said that the Bush Administration also believes that the FHASecure program should be expanded temporarily to address the housing downturn. He said that the program, announced last year to help more low-to-moderate income families who could not otherwise qualify for prime rate refinancing has assisted more than 150,000 homeowners and projects it will reach more than 400,000 families by year's end.
Expanding this program would need to be achieved in a way that is consistent with the Administration's principles. He suggested that special underwriting flexibility should include making eligible more borrowers who were late on a couple of mortgage payments. Such underwriting changes could be made in exchange for lenders writing down mortgage principal in order to meet the prescribed loan-to-value ratio or allowing the FHA to adjust insurance premium amounts to cover the increased risk.
The FHA, he said, should maintain its 'bedrock principles' such as that an eligible family live in the FHA-insured home and have documented, verifiable income and reiterated that the FHA should not be forced legislatively to compromise its standards at the future expense of the taxpayer. Any expansion of the program should allow the agency to establish a new and more flexible pricing policy for its insurance products at rates sufficient to ensure the safety of the insurance fund.
As to the specifics of the bill about which the hearings were being held, he relayed the Administration's concerns and/or opposition to essentially the whole proposal. He said that Title I of the bill which would permit FHA to provide up to $300 billion in loan guarantees to help troubled homeowners refinance would permit lenders to disregard some underwriting criteria and allow borrowers with much higher debt-to-income ratios to be eligible. The bill also he said, requires lenders to disregard current credit scores or delinquencies on existing mortgages when deciding whether a borrower has a reasonable chance of repaying the mortgage.
Title II, which would allow lenders or servicers to sell bad loans to taxpayers through an auction process or some other wholesale mechanism is also not acceptable to the Administration. Montgomery said that the market does not need a government entity such as an Oversight Board or a new enabling mechanism as, under an expansion of FHASecure, these sales can occur in the private market.
Title III of the proposed legislation which would provide $10 billion in loans and grants to state and local governments to purchase and rehabilitate vacant foreclosed homes is not supported by the Administration because it is a bailout of lenders and speculators while doing little to keep struggling families in their homes. In addition, he said, such a program might actually make foreclosure a more attractive option for lenders.
Other speakers on Wednesday were primarily heads of other government agencies such as FDIC, Comptroller of the Currency, and several noted economists.
On Thursday, the second day of the hearings, the Congressmen were scheduled to hear from the mayors of Boston, Las Vegas, and the District of Columbia, the Governor of Maryland, and the heads of a number of advocacy groups including La Raza, the NAACP, and the U.S. Hispanic Chamber of Commerce. We will let you know if anything interesting transpired.