Private mortgage market sidelined by housing agency dominance
A lack of clarity about the future of federal housing agencies has kept private capital on the sidelines of the mortgage finance system, U.S. lawmakers warned Wednesday.
Congressional leaders and housing analysts expressed those fears during a hearing, examining the role of the Federal Housing Administration and private insurers, before the House Committee on Financial Services.
Committee Chair Jeb Hensarling, R-Texas, called forging a sustainable housing market for both families and the economy a high priority, but lamented the size and scope of the Federal Housing Administration.
"I'm concerned that what were once extraordinary measures taken have now become ordinary measures," Hensarling said when discussing the government's role in shoring up the housing market through further reliance on the housing agencies.
As a result, Hensarling and panelists attending the hearing suggested the FHA return to its pre-crisis role.
Resident Fellow Edward Pinto at the American Enterprise Institute suggested the FHA’s mission allows for the continuation of practices that result in "a high proportion of families losing their homes and represents a disservice to American families and communities."
"By unfairly competing with private capital, housing finance reform is blocked," Pinto said.
Managing Director Basil Petrou at the Federal Financial Analytics noted that even if FHA reform is speedily enacted in a meaningful fashion, the transformation may still lack the impetus to fully create a mortgage-finance system functioning mostly on private capital.
Petrou suggested Congress work to ensure that an array of pending prudential rules for banks do not favor government-backed mortgages, which is a barrier to re-entry for private capital. Furthermore, he advised lawmakers to push for constructive reforms for Fannie Mae and Freddie Mac.
"Although many pending rules would exempt the GSEs in conservatorship, treating them essentially the same as FHA, the conservatorships should end as quickly as possible," Petrou said.
In November, the Department of Housing and Urban Development released the FHA actuarial assumptions, showing further decline in the Mutual Mortgage Insurance Fund (MMIF), with the capital reserve ratio falling to negative 1.44%. Additionally, the MMIF’s economic value was negative $16.3 billion.
As a result, the FHA does not have sufficient reserves to cover its expected losses and furthermore, the agency is vulnerable to further defaults, according to a memorandum released by the House Financial Services Committee.
While no definite consensus was agreed upon, many noted their concerns that the FHA will likely draw funds from the Treasury when the Obama Administration releases its full-year 2013 budget proposal some time this month.
While Director Julia Gordon of Housing Finance and Policy at the Center for American Progress agreed that the actuarial report is not in ‘good shape,’ she noted the finances are not a reflection of a flawed business model, but rather losses due to post-crisis business and seller-financed down payment programs.
Though the losses from loans originated between 2005 and 2009 will continue to appear on the agency’s books for several years, the FHA’s more recent book of business is expected to be very profitable, Gordon said.
Additionally, Gordon said the government-sponsored enterprises cannot stay in conservatorship indefinitely.
Similarly, real estate professor Anthony Sanders with George Mason University said there needs to be a shrinkage of the government's footprint in housing.
With the FHA’s share of mortgage originations at more than 25%, it’s time for the agency to shrink back to its previous size, such as in 2003 when it's market share stood at 10%, Sanders said.
Thus, to protect households and taxpayers Sanders encouraged a FICO-score floor of 660 for FHA-insured loans. Additionally, the FHA should adjust to a minimum down payment of 5% and also lower the loan limit to $625,000 and eventually to $350,000, Sanders asserted. Finally, the agency should lower the insurance coverage to 80%, the professor suggested.
"All these measures can serve to reduce the FHA’s substantial, high-risk footprint in the mortgage market," Sanders told the Committee.