In broad ranging testimony before the Senate Committee on Banking, Housing, and Urban Affairs on Tuesday, Housing and Urban Development (HUD) Secretary Shaun Donovan touched on the substantial risks confronting FHA and its Mutual Mortgage Insurance (MMI) Fund in the coming years and the potential for returning the Fund to solvency by 2015.
The MMI Fund, Donovan said, has seen high numbers of claims from originations prior to 2009 and this has severely impacted the health of the fund. Through systematic tightening of risk controls, increased premiums, and expanded use of loss mitigation, the situation has turned around that the outlook for FHA and the Fund are much brighter than they were in 2009.
But further steps to strengthen MMI are still necessary and Donovan said that an increase of both upfront and annual premiums were announced on Monday which will increase premium receipts to FHA by $1 billion in FY 2012 and 2013 beyond those included in the President's budget. But problems remain. MMI has two components, the Financing Account which holds enough money to accommodate expected 30 year losses on FHA's insured portfolio as of the end of the current fiscal year; and the Capital Reserve Account which Congress mandates must hold an amount equal to 2 percent of the insurance in force. Since 2009 Capital Reserves have been below that level.
The President's Budget estimate of the status of the capital reserve at the end of the current fiscal year did not include the revenue from the increased premiums but also the proceeds from the recently announced settlements with FHA-approved lenders. The Budget does estimate that FHA will add an additional $8 billion to the Reserve Account in 2013 and will return to the congressionally mandated capital reserve ratio of 2 percent by 2015.
Donovan devoted most of his testimony to updating the Senators about the housing initiatives proposed by President Obama in his State of the Union and subsequent speeches. Donovan said that one of the most important ways the administration proposes to help keep people in their homes is through broad-based refinancing programs and pointed to the FHA Streamlined Refinance Program. This program allows borrowers with FHA insured loans who are current on their existing mortgages to refinance into a new FHA insured loans at current low interest rates without requiring additional underwriting.
Donavan said because FHA sees a potential for more widespread use of this product, it will make changes to the way in which streamline refinance loans are displayed in the Neighborhood Watch Early Warning system so that lenders are not on the hook for loans they did not originate and thus will be more willing to provide the refinancing.
FHA is also taking steps to make these streamline loans more widely available by adjusting the premium structure for all Streamline Refinance transactions that are refinancing FHA loans endorsed on or before May 31, 2009. These changes will ensure that borrowers benefit from a net reduction in their overall mortgage payment while still ensuring FHA has the resources to pay any necessary claims.
Industry insiders said that it was unclear what Donovan meant by this statement, but that there will be an FHA meeting with servicers on Wednesday and a Mortgagee Letter scheduled for release on Thursday so they expect more information will be forthcoming.