Federal Housing Administration Commissioner Carol Galante testified before the House Financial Services Committee, asserting that the federal agency can avoid an immediate Treasury bailout.
Congressional members grilled Galante Wednesday on the potential risk to taxpayers after a November actuarial report on the financial health of the FHA showed the value of the agency's Mutual Mortgage Insurance Fund stands at negative $16.3 billion.
In addition, the capital reserve ratio of the fund fell below zero to negative 1.44%, according to the recent report.
Galante stated that while the projected report is of very serious concern, it is not the determining factor as to whether FHA will need to draw on permanent budget authority from the U.S. Department of Treasury.
"Any determination that such a draw is necessary will not be made until the end of FY 2013, and in any event, does not affect the full faith and credit of the Federal Government to pay any claims," Galante said.
She added, "The ultimate need will be borne out in the actual performance of the FHA single-family program over the course of the fiscal year, and will be impacted by the steps FHA takes over the course of the year to increase revenue or reduce losses."
For instance, President Obama’s fiscal year 2012 budget submission, anticipated that FHA would need to draw close to $700 million in assistance from the Treasury to cover expected claims. Instead, at the end of 2012, the Capital Reserve Account held $3.3 billion, which was due to policy changes that improved the value of the Fund, Galante said.
As a result, Galante said new policies changes enacted this year are expected to reduce the need to draw on Treasury assistance.
The commissioner stated that the FHA has taken actions to protect and strengthen the MMI Fund’s value by adding $31 billion.
Additionally, for the fifth time, FHA increased its annual mortgage insurance premium for most new mortgages by 10 basis points.
"These are essential and appropriate measures to manage and protect FHA’s single-family insurance programs," Galante said.
Going forward, Galante noted that she does not see any additional premium hikes, "we think that is the right pricing of the risk," the commissioner told Congress.
Congresswoman Maxine Waters, D-Calif., asked Galante what FHA legislative provisions are being requested to strengthen the agency long term.
Galante outlined legislative proposals to enhance the agency’s ability to hold lenders accountable for non-compliance with FHA policy as well as plans to provide greater flexibility for FHA to make changes to policies and procedures.
For instance, the provision of indemnification authority for direct endorsement lenders would allow FHA to seek indemnification from Direct Endorsement lenders, representing 70% of all FHA approved lenders. By granting this authority, FHA would obtain indemnification from all of its approved lenders for loans that do not comply with its guidelines.
An additional provision includes authority to terminate origination and under writing approvals, giving FHA enhanced ability to review lender performance and provide greater flexibility in terminating the approval of the lender to originate or underwrite single-family mortgages for FHA insurance.
To facilitate more effective loss mitigation, the FHA requests the authority to transfer servicing, giving the agency the authority to require poorly performing servicers to transfer individual loans to another servicer with better performance results.
"Such authority would permit FHA to better avoid losses arising from poor servicing of FHA-insured loans, yielding better results for both borrowers and FHA," Galante said.