FHA is "Not the Next Subprime": HUD's Donovan
US Department of Housing and Urban Development (HUD) secretary Shaun Donovan told lawmakers the Federal Housing Administration's (FHA) single-family insurance program is "not the next subprime" despite reports that draw attention to the swelling volume of FHA loans and steep default-related losses at the program. The capital reserve ratio at the FHA, which ensures approved lenders against default-related losses, recently plunged below the congressionally-mandated 2% minimum. HUD aims to strengthen the capital position at FHA by enforcing standards and cutting down on lenders that violate FHA's standards, most recently this week with the withdrawal of Lend America's FHA approval. Donovan indicated in prepared testimony delivered to the House Financial Services Committee (available to download here) other changes may be coming to FHA. He said HUD may increase lender accountability as well as raise insurance premiums, minimum FICO requirements and minimum required downpayments to ensure new FHA borrowers keep more "skin in the game." "[W]hile FHA must remain a key source of safe mortgage financing at a critical moment in our country’s history, we recognize the risks that we face and the challenges of this temporary role that we play in today’s market," Donovan said in his testimony. "And the bottom line is this: the loans FHA insures must be safe and self-sustaining for the taxpayer over the long-term." The FHA's actuarial review for fiscal year 2009 projected more than 71% of losses to come over the next five years will come from loans already on FHA's existing books. One area of steep loss, seller-funded downpayment assistance, continues to affect FHA's capital position despite the ban on this practice. This type of financial assistance allegedly went hand-in-hand with high rates of defaults where borrowers put little personal cash -- or none at all -- on the closing table. Outside of continued losses from existing seller-funded loans, the FHA's capital reserve ratio would remain above the required 2% minimum, Donovan told the House panel. Donovan also asked for greater authority for HUD to monitor FHA lenders and enforce lender accountability for fraudulent practices that affect the insurance fund. Write to Diana Golobay.