HUD Open to Raising FHA Insurance Premiums Again, If Necessary

With its MMI Fund capital reserve ratio well beneath the Congressionally mandated level of 2%, the Federal Housing Administration (FHA) is in danger of needing a taxpayer bailout if the housing market keeps declining, according to its acting commissioner in November. The agency is looking into some potential policy options that would support the Fund, including insurance premium increases, said Department of Housing and Urban Development (HUD) Secretary Shaun Donovan.

The FHA was blasted for its 0.24% capital reserve ratio at Thursday’s House Financial Services Committee Hearing, Perspectives on the Health of the FHA Single-Family Insurance Fund, during which Donovan listed five primary areas of focus to ensure better Mutual Mortgage Insurance (MMI) Fund performance going forward.

Insurance premium increases topped the list, which also includes lender enforcement, loss mitigation, requirements for borrowers, and REO and pre-REO recovery.

“FHA is constantly evaluating the appropriate level of premiums given the potential risks to the MMI Fund, and any action regarding premiums will be considered in the context of balancing access to credit in today’s economic environment with the need for added revenue generation to protect the Fund,” said Donovan in his written testimony that was submitted to the Committee members. “This is a delicate balance, but we know we must first and foremost protect the Fund’s resources so that its programs remain continually available.”

The fiscal year 2011 Annual Report to Congress on the financial status of the FHA’s MMI Fund revealed that its capital reverse ratio had fallen still further from 0.50% to 0.24%, and the agency’s acting commissioner Carol Galante wrote in letter to Congress that the FHA could potentially need a bailout if the housing market continues to slide.

In 2010, the FHA raised insurance premiums three times, leading to an increase of $1.37 billion in the FY 2011 economic value of the MMI Fund, while not affecting housing affordability, Donovan said in his testimony.

The HUD secretary did not specifically mention the HECM program in regards to possibly raising insurance premiums, but the program will not necessarily be excluded as a HUD spokesperson confirmed the department is evaluating a “number of possibilities” with more information to be announced soon.

Insurance premiums for the HECM program were raised from 0.50% to 1.25% in October 2010, which Henry V. Cunningham, Jr., who testified on behalf of the Mortgage Bankers Association, called a step “towards ensuring that the HECM reverse mortgage program remains a viable financing option for seniors.”

Changes to the program are necessary, several Committee members emphasized.

“If we’re not careful, it could become Fannie and Freddie, the Sequel,” Representative Jeb Hensarling said during the hearing, after calling the agency a “disaster in the  making.”

Written by Alyssa Gerace

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