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Lending

CBO: FHA reform bill could save government $514M

Insurance premiums would rise to meet capital requirements

piggy bank

The Senate-proposed Federal Housing Administration Solvency Act could reduce federal discretionary spending by $514 million over a four-year period of time, while forcing the FHA to build up to a 3% capital ratio, the Congressional Budget Office said Tuesday.

The net decrease would occur in the fiscal years stretching from 2014 to 2018, the report said.

The capital ratio is a benchmark that balances the FHA’s total mortgage insurance risk against its capital buffer. Currently, the Mutual Mortgage Insurance fund is required to maintain a 2% capital ratio — a ceiling that would essentially be lifted periodically in a post-FHA Solvency Act world.  

The solvency act, or Senate Bill 1376, is premised on the idea that the FHA’s Mutual Mortgage Insurance Fund should work its way up to a capital reserve ratio of 3% within 10 years, according to legislation drafted by Sens. Tim Johnson, D-S.D., and Mike Crapo, R-ID.

Along the way, if the capital ratio falls below certain established targets, the proposed bill would force HUD to take immediate action.

The act essentially requires the FHA to meet certain targets as it builds its way up to a 3% capital ratio.

During the build-up period, CBO says guarantee increases would be the inevitable result of the FHA MMI fund falling below a set benchmark.

For example, CBO says a 10% surcharge on guarantee fees could be tacked on if an actuarial report for fiscal 2016 were to show a capital ratio below 1.25% as the agency works its way up to the new 3% benchmark.

Sens. Johnson and Crapo proposed the bill to mitigate the risk of future government bailouts.

Early on, the Senators said the plan would force subtle increases in annual insurance premiums to ensure the long-term solvency of the FHA. Under the bill’s guidelines, premium levels would be reviewed each year to ensure premiums on loans can cover expected risks while maintaining the FHA's overall capital reserve ratio.

The bill, which has yet to pass the House or Senate, also would stabilize the FHA’s reverse mortgage program by giving the position of US Department of Housing and Urban Development Secretary more flexibility in terms of operations.

FHA Commissioner Carol Galante went on record earlier this year, telling lawmakers that the bill offers FHA leaders new tools to manage risk and lines of business, especially for the reverse mortgage program. Yet, the commissioner hesitated when the issue of mandatory premium increases surfaced in front of the Senate Banking Committee.

Galante noted that premiums are only one factor to consider in rebuilding that supplemental account.

The FHA leader warned that premium increases could create other risks in the form of weaker credit access and endorsement values.

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