Hensarling: Health of FHA is “clear and present danger” to economy

House Financial Services Committee chairman calls for FHA reform

Never one to shy away from a strong opinion or colorful verbiage, House Financial Services Committee Chairman Rep. Jeb Hensarling, R-Texas, said Wednesday that the financial health of the Federal Housing Administration poses a “clear and present danger to taxpayers, homebuyers and the U.S. economy.”

Hensarling made the statement in the wake of the FHA releasing its 2017 annual report, which showed that its flagship insurance fund declined this year, which is the first time in five years that the MMI Fund has not improved.

The FHA annual report showed that that key figure in the health of the MMI Fund, its capital ratio, remained above the Congressionally mandated threshold of 2% this year, but declined from 2.35% last year to 2.09% in 2017.

In a statement released Wednesday afternoon, Hensarling calls the MMI Fund’s current capital ratio a “precarious” position.

Hensarling also said that FHA’s financial results demonstrate a dire need for housing finance reform.

“FHA has suffered a severe case of mission creep, and the unfortunate truth is that the lack of sound underwriting and risk management puts taxpayers, homebuyers and our overall economy in harm’s way,” Hensarling said Wednesday.

“The danger is real. Unless and until Congress passes serious reforms to give Americans a sustainable housing finance system, we will constantly be on the edge of another housing meltdown and financial crisis,” Hensarling continued. 

“To be successful, the FHA must be fiscally sound and have a clearly defined mission to ensure homeownership opportunities for creditworthy first-time homebuyers and low-income families,” he added.

It should be noted that the decline in the health of the MMI Fund appears to be driven entirely by the FHA’s reverse mortgage program, the Home Equity Conversion Mortgage program.

According to the FHA report, the standalone economic net worth of the HECM portion of the MMI Fund is -$14.5 billion at the end of fiscal 2017, and the HECM portfolio’s standalone capital ratio is -19.84%.

Conversely, the capital ratio of the forward mortgage insurance portfolio is 3.33%.

But Hensarling did note, as the FHA’s report did, that had an Obama administration cut to FHA mortgage insurance premiums been allowed to go into effect, the performance of the MMI Fund would have been worse.

The 25-basis-point cut was due to take effect on Jan. 27. 2017, but in the opening moments of President Donald Trump’s term in office, his administration announced the suspension of the previously announced reduction to FHA mortgage insurance premiums.

The FHA 2017 Annual Report shows that had the premium reduction taken effect in January, the MMI Fund’s capital ratio would have fallen to 1.76%, which would be below the Congressionally mandated minimum.

“As I did back in January, I once again commend President Trump’s decision to suspend the outgoing Obama administration’s ill-advised and 11th hour rule change on FHA mortgage insurance premiums,” Hensarling said Wednesday. “Without this action by President Trump on his first day in office, this annual report confirms that the FHA would be in even worse shape today.”

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