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House letter could spark severe FHA reform debate

A House Oversight and Government Reform Committee letter to the Federal Housing Administration questioning the possibility of future losses in times of severe distress is likely to reignite the FHA reform debate on Capitol Hill, analysts claim.

The letter was sent to FHA Commissioner Carol Galante, regarding a previously unreleased estimate of the FHA’s solvency under a worst-case scenario.

If a worst-case scenario were to occur, the FHA would suffer $115 billion of losses over the next 30 years, based on the unreleased estimate. The results were not included in the agency’s actuarial analysis and the letter contends that the “FHA was determined to avoid disclosing the magnitude of the FHA’s capital inadequacy.”

Since a swarm of hearings regarding the FHA’s solvency and mission in the first quarter of the year, the House Financial Services Committee and Senate Banking Committee have been relatively quiet on the issue, analysts for Compass Point explained.

This investigation by Rep. Darrell Issa, R-Calif., will feed in to a renewed interest within the committees to revisit the issue of what the future of the FHA holds.

“Right now, in my discussions with [Senate Banking Committee Chairman Tim Johnson], we are going to move ahead with an FHA reform bill first that will not expand into” government-sponsored enterprise reform, said Sen. Mike Crapo, R-Idaho, in regards to the investigation.

While the letter is going to spark FHA reform interest among regulators, there’s little hope that this will lead to Congress passing any legislation, Compass Point analysts noted. 

“We remain pessimistic regarding legislation passing at this point in time due to a meaningful policy divide over the FHA’s mission,” the research team added.

Although both parties would like to enact FHA reform, it’s a matter of degrees.

For instance, Republicans would like to take steps to enhance underwriting criteria — higher down payments, lower loan limits and increase mortgage insurance premium ceilings.

On the other hand, Democrats are fearful about constricting mortgage credit and instead would like to enact a tailored set of reforms, which would increase the FHA’s operational latitude, according to Compass Point.

“We believe that as long as the discussion on Capitol Hill remains focused on redefining the FHA’s broader mission – which remains the case at this point in time – the prospects for FHA reform legislation are bleak,” the research firm added.

However, if FHA reform – depending on its specifics – were to happen, it would likely have an impact on three key areas: homebuilders, private mortgage insurers and specialty servicers.

Homebuilders would be impacted because the FHA is 20% of the new home purchase market and reform would likely tighten credit standards, the report explained.

Additionally, private mortgage insurers would be impacted because reform would give the FHA more headroom to increase mortgage insurance premiums, which would impact the market share dynamic.

Finally, specialty servicers would feel the consequences of such a reform because the FHA has requested that reform include increased latitude for the agency to mandate bulk servicing transfers on their loans, Compass Point concluded. 

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