Written by H. West Richards, as originally published in The Reverse Review.

As we approached the first week of March, both the House and the Senate held key hearings on the issue of housing. The significance of these hearings was substantial. While the Senate tackled the overall state of the housing market, the House tackled the potential insolvency of the FHA Mutual Mortgage Insurance (MMI) and, in particular, the MMI’s capital reserve fund. Ultimately, both hearings focused almost entirely on the solvency of the FHA. Obviously, this is an issue the reverse mortgage industry must continue to follow. Here is a summary of the hearings that took place.

HOUSE SUBCOMMITTEE HOLDS HEARING ON OVERSIGHT OF HUD
On Tuesday, February 28, the House Financial Services Subcommittee on Insurance, Housing and Community Opportunity held a hearing titled “Oversight of the Department of Housing and Urban Development.” Witnesses included five assistant secretaries from the Department of Housing and Urban Development and the hearing focused on the potential insolvency of the Federal Housing Administration’s capital reserve fund and the proposed budgets for housing assistance programs in fiscal year 2013. Both witnesses and representatives stressed that HUD must learn to operate with a smaller budget.

SENATE BANKING COMMITTEE HOLDS HEARING ON STATE OF THE HOUSING MARKET
Also on Tuesday, February 28, the Senate Banking and Housing Committee held a hearing titled “State of the Housing Market: Removing Barriers to Economic Recovery, Part II.” HUD Secretary Shaun Donovan testified about the administration’s refinancing plan, which extends eligibility to mortgage owners who have been paying their monthly mortgage and who meet other requirements to refinance. Secretary Donovan outlined the importance of refinancing to help Americans build equity and to improve the U.S. housing market. Federal Reserve Board Governor Elizabeth Duke and Federal Housing Finance Agency Director Ed DeMarco also spoke on the importance of refinancing options for homeowners. Both agreed that the worst thing for the housing market right now is continued foreclosures. Both stressed that avoiding foreclosures assists all homeowners by creating market stability in pricing. According to those in attendance, what originally began as an economic analysis by a University of Pennsylvania professor quickly developed into an all-out inquiry into the financial solvency of the FHA. Ultimately, it was a culmination of testimonies and audits that put the agency’s possible need of a taxpayer bailout at 50 percent. With the FHA growing its loan support in the marketplace from 3 percent to 33 percent in recent years, and with housing being the driver of most (if not all) economic recoveries, the idea of an unstable, potentially insolvent FHA is indeed a disturbing one.

SUMMARY
The FHA guarantees loans to homebuyers with relatively low interest rates and down payments. The agency’s role in homebuying has never been more important in the wake of tightening credit standards at private banks and the soaring demand for FHA financing. Despite this, all of the costly boom-era, subprime loans on the agency’s books are wreaking havoc on its balance sheets, fueling concerns that the FHA will need

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a Fannie Mae/Freddie Mac-style bailout from taxpayers.

HUD Secretary Donovan testified before the House Financial Services Committee back in December of 2011 that although the FHA’s finances are worrisome, he remained confident about how the agency was operating. His comments instigated a wave of harsh feedback from Republicans and Democrats alike, who said the agency was in denial.

The FHA has made attempts to raise its revenue. Since 2010, it has raised insurance premiums three times, which are the primary revenue method for the agency. There is a definite limit, though, to how high the rates can be raised, Donovan said. Raise premium rates too aggressively, and fewer prospective homebuyers will have access to FHA financing. The fewer who can access financing, the fewer homes will be sold, further driving down prices in an already delicate housing market.

A recent FHA audit predicted that upcoming losses on the agency’s $1.1 trillion balance sheet would leave just $2.6 billion in reserves for the next 30 years, which account for only 0.24 percent of the agency’s mortgages. Although federal law requires reserves to be at 2 percent of mortgages, the FHA has exceeded that limit in the past two years.

The FHA has officially announced that in an effort to boost its MMI, it will raise its insurance premiums in April. Acting FHA Commissioner Carol Galante said it will raise premiums from 1 percent of the base home loan amount to 1.75 percent, regardless of the loan’s term or LTV ratio. The percentage is based on funding measures authorized by Congress’ latest payroll tax-cut increase and will add an additional $1 billion to the FHA’s insurance fund, as the annual insurance premium will rise by 10 basis points for loans under $625,500 and 35 basis points for loans above. Both reverse mortgages and special loan programs will be exempt from the changes. Galante said that the premium increase was primarily instituted to meet congressionally mandated thresholds for FHA solvency.

“After careful analysis of the market and the health of the MMI fund, we have determined that it is appropriate to increase mortgage insurance premiums in order to help protect our capital reserves and to continue encouraging the return of private capital to the housing market,” Galante said.

The premium changes would assist the FHA in gracefully exiting the pre-eminent role it has uncomfortably played in the mortgage markets since 2008. The FHA currently has an elevated market share of 32 percent, and in 2009, it endorsed $360 billion in new mortgages. That number fell to $236 billion in 2011, and the agency intends to decrease it further to $150 billion in fiscal 2013.

Funds at the FHA had been operating under precarious circumstances. In 2008, the agency’s MMI fund fell below the 2 percent threshold Galante referred to, mostly because of a growing number of distressed properties on the FHA’s books. In 2011, it fell to 0.2 percent, a level that inspired many to warn of an impending insolvency for the firm.

Just when analysts were predicting a bailout of the agency, though, the mortgage settlement between the state attorneys general and the nation’s five largest banks arrived, and as part of the agreement, the banks injected $1 billion into the FHA’s capital reserve fund to compensate for the monetary damages due to fraud and foreclosures. Although many credited the settlement for saving the agency’s books, the premium hikes suggest the FHA is not taking its return to solvency for granted.

“The FHA is not broke,” Galante said to the lawmakers.

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”It would take very significant declines in home prices in 2012 to create a situation where the FHA would need additional support.”