CBO: FHA Reform Bill Would Save $514 Million

A proposed Senate housing bill would save the government more than $500 million in its efforts to strengthen the Federal Housing Administration’s (FHA) mortgage insurance fund, a new estimate finds. 

If passed, the Senate-proposed FHA Solvency Act of 2013 (s. 1376) could save the federal mortgage insurer $514 million over a four-year period from 2014-2018, according to estimates from the Congressional Budget Office (CBO).

The bill aims to make several changes to current law by improving the financial security and stability of the FHA’s Mutual Mortgage Insurance (MMI) fund. 

Under S. 1376, FHA would be required to take certain correct actions if the annual actuarial review of the MMI fund indicates that the capital reserve ratio has fallen below certain targets, says CBO.

The bill would also allow FHA to make other administrative changes to the processes they use to oversee the single-family and HECM programs—authority long sought for by FHA.

The MMI fund, which backs FHA’s single-family mortgage guarantee program and the Home Equity Conversion Mortgage (HECM), revealed a $16.3 billion shortfall during a November 2012 actuarial review.

The same review also revealed that the FHA had a capital reserve ratio of -1.44%, considerably lower than the 2% ratio the agency is required to maintain by law. This led to the agency requesting a $1.7 billion capital infusion from the U.S. Treasury.

While currently the FHA is required to maintain its 2% capital ratio, enacting S. 1376 would require FHA to evaluate the premiums it charges for mortgage insurance on an annual basis.

The legislation would also require FHA to achieve a capital ratio of 3% within 10 years of the bill’s enactment, and would establish additional reporting requirements and programmatic changes if the MMI fund does not meet certain targets as it builds toward achieving the 3% ratio. 

For example, FHA would be required to impose a 10% surcharge on its guarantees if the actuarial report for 2016 reveals that the capital ratio is less than 1.25%.

While CBO does not expect FHA to impose this surcharge in 2016, it does, however, expect the agency to increase its initial and annual insurance premiums beginning in 2018 in order to meet the 3% capital ratio requirement for the MMI fund by 2023. 

CBO estimates that these reporting requirements and other administrative activities required to maintain “adequate capital balances” in the MMI fund would cost $10 million over the 2014-2018 period. 

The bill would not affect direct spending or revenues, CBO states, so pay-as-you-go procedures do not apply.

Written by Jason Oliva

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