FHA: Stabilizing Reverse Mortgage Program is Crucial

Amid growing concerns that the Federal Housing Administration (FHA) could require a taxpayer-funded bailout, Commissioner Carol Galante answered to House Republicans today on the agency’s negative economic position.

Stabilizing the agency’s Home Equity Conversion Mortgage (HECM) program is an “important mission objective” for FHA, Galante said during today’s hearing before the House Financial Services Committee, pointing to changes that have already taken place for reverse mortgages.

Galante acknowledged the program represents 17% of FHA’s mortgage insurance portfolio’s economic loss, but pointed out that the agency has already enacted significant changes, specifically a moratorium on its fixed-rate standard product set to take effect April 1. The change is in response to an actuarial report published in November 2012 revealing the reverse mortgage program stands at a negative net worth of $2.8 billion.

“FHA will take immediate action to better align the program with its objective of enabling seniors to age-in-place,” said Galante. “These changes will protect FHA from losses and reduce the likelihood of borrower defaults due to nonpayment of property taxes and insurance.”

The agency’s 56% share of the mortgage market in terms of loan endorsements, along with its insurance portfolio valued at a negative $16.3 billion, has stirred anxieties among the House Committee, fearing a bailout might be around the corner.

Another central step toward improving FHA’s negatively valued insurance fund was raising insurance premiums on its forward mortgage business 10 basis points as well as several other risk management procedures, Galante stressed during the hearing in response to calls for reform.

During a hearing last week, Committee Chairman Jeb Hensarling called FHA “flat broke,” and claimed the agency is at risk of becoming the next Countrywide given its credit score policies and high default rates.

“For us to have a healthy economy, we must put the nation on a sustainable fiscal path,” said Hensarling at today’s hearing. “And to have a sustainable fiscal path, we must also have a sustainable housing finance system. I have grave fears that FHA, as it is operating today, is an impediment to both.”

The Committee even accused FHA of straying away from its original mission of assisting lower- and moderate-income borrowers, as it provides high limit loans of over $700,000.

The FHA remains true to its mission of assisting lower wealth borrowers, Galante countered, as those who qualify for high-limit of loans only represent 0.5% of FHA’s business.

Without FHA, home prices would have dropped an additional 25% and the nation would have lost nearly 3 million jobs, according to analysis by Moody’s Analytics that was brought up several times throughout the hearing.

“FHA must continue to be a reliable steward of taxpayer dollars and also remain a key source of access to homeownership for the families of today and for future generations,” said Galante.

Written by Jason Oliva

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