Mortgage

HUD’s Castro grilled on FHA premiums, capital strength

Hensarling: "You are in violation of the law"

The United States House of Representatives Committee on Financial Services grilled the Secretary for the U.S. Department of Housing and Urban Development Julian Castro Wednesday morning to unveil the status of the housing regulator.

At the beginning of January, the Obama Administration directed, via executive action, the Federal Housing Administration to reduce annual mortgage insurance premiums by 50 basis points, from 1.35% to 0.85%.

The White House statement said that for the typical first-time homebuyer, this reduction will translate into a $900 reduction in their annual mortgage payment.

“Existing homeowners who refinance into an FHA mortgage will see similar reductions to their mortgage payments as well,” the Obama Administration’s statement said. “In total, this action will help millions of families save billions of dollars in mortgage payments in the coming years, helping to support the housing market recovery.”

The purpose of the hearing was to examine the financial status of the FHA, particularly the health of the Mutual Mortgage Insurance Fund. And while there were members of the committee that commended Castro on his work, the hearing titled, “The Future of Housing in America: Oversight of the Federal Housing Administration,” quickly turned into a heated interrogation by House Financial Services Committee Chairman Jeb Hensarling, R-Texas, and others on the potential threat and impact to the America taxpayer.  

“We strengthened underwriting standards, overhauled our loss mitigation process, and increased insurance premiums five times since 2010. The result of these actions is a $21 billion improvement to the value of the Mutual Mortgage Insurance Fund in just two years,” said Castro in his beginning testimony (A full copy of his testimony can be found here). “With FHA’s most recent independent actuarial analysis showing ongoing improvement, and the overall housing market’s continued recovery, it is clear FHA has turned the page on the recession.”

U.S. Rep. Maxine Waters, D-Calif., Ranking Member of the Financial Services Committee, was one of the few to praise Castro.

“Secretary Castro, although today you will likely take a fair amount of criticism from my colleagues on the other side of the aisle for your decision, I’d like to take a moment to remind them that when the private sector virtually left our struggling housing market during the worst of the crisis, the FHA stepped up and provided the liquidity that kept it afloat. Despite the steps toward recovery the economy has taken since then, the housing sector continues to suffer from a tight lending environment – and a strong FHA is still very necessary,” said Waters.

“I would also note that FHA is far from bankrupt, holding approximately $40 billion in reserves, continuing to generate revenue, and taking critical steps to recover its capital reserves, which are projected to show a positive balance in 2015,” she added.

But despite her praise, the other side of the aisle took the opportunity to pounce on the secretary.

The crux of Hensarling’s argument was that no matter what initiative HUD is taking it is not following the law.

“The MMIF must maintain a capital reserve ratio of no less than 2%. It’s not may. It’s not might. It’s not hope. It says shall,” said Hensarling. 

Federal law mandates that the Mutual Mortgage Insurance Fund maintain a capital reserve ratio of no less than 2%. However, on Nov. 17, 2014, the FHA reported to Congress the findings from its most recent independent actuarial review, which indicated a capital reserve ratio of 0.41%.

“This is the fear many of us have, particularly members of the Obama administration,” said Hensarling.

Recently in another hearing, Hensarling explained that a government regulator said, “whenever we can we follow the law.” Hensarling is concerned that HUD is following an even lower standard, which is “whenever we want to we follow the law.”

Hensarling directly asked Castro: Is the MMIF stronger or weaker? This is a question that Castro was continuously asked, always answering that the fund is on a strong path to reaching 2% and will reach it in the next 2 years.

“All of us at HUD are working hard to reach the 2% capital reserve ratio,” Castro.

But unlike leaders of the committee who have been there for a while, time is working against Castro.   

“With all do respect (Castro), we have heard that before, and you are sincere. But this committee has been told that once, twice, three times, and it hasn’t proven true,” said Hensarling. “Once again, you are in violation of the law and that has got to stop.”

Many of Castro’s responses centered on how FHA has always had stronger, fuller underwriting and has strengthened that even further in the last years.

“We have improved the lender’s that we work with to require a higher net worth there. We are in a much stronger spot and to reach that 2% capital reserve ratio,” said Castro.

Castro explained that they continue to strengthen the fund, and at the same time help people who can afford it to have more access to credit.

However, Rep. Scott Garrett, R-N.J., chairman of the Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, accused HUD of predatory lending.

The FHA has lowered credit scores, lowered down payments, lowered premiums, inadequate upfront pricing and high value maximum loan limits, all things that the FHA is advocating, Garrett said. If at the end of the day the results are positive, that’s one thing. But at the end of the say, the default rate increased, he said.  

“We define this as predatory lending, but how come you can do this. Predatory lending leads to devastating impact on families,” said Garrett.

Castro responded stating that the FHA did not push the toxic products, like so-called 'NINJA' loans. In fact, the down payment options now have been at place for 50 years.

“I assume intelligence in the American people. We have always had strong underwriting. The premium is not changing who actually qualifies for an FHA loan. It is simply making it more affordable for hard-working America,” said Castro.  

U.S. Rep. Sean Duffy, R-Wis., commented that this timeline is still not fast enough.

“If you didn’t have the current fee of 1.35% instead of 0.85%, wouldn’t we get to 2%, far more quickly,” Duffy asked.

And while Castro responded saying, “I agree with you that we would get to 2% a little more quickly but not significantly more quickly,” Duffy still concluded that in the end, “HUD is not in compliance with the law, and you should do everything you can to get there more quickly.” 

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