Industry Urges House Lawmakers to Reform FHA
While Federal Housing Administration (FHA) commissioner David Stevens told the House Financial Services Housing and Community Opportunity subcommittee his agency is taking steps to implement reform and “shore up” the government mortgage insurance program, other industry experts continued to express concern over the FHA’s strength. The subcommittee heard testimony as part of its deliberations on the FHA Reform Act of 2010, legislation introduced this week that would give the Department of Housing and Urban Development (HUD) authority to set FHA annual premiums and hold mortgage originators responsible for bad loans, as well as increased power to impose sanctions on problem lenders. FHA commissioner Stevens said the FHA currently insures about 30% of purchase mortgages and 20% of refinance mortgages in the market. Stevens said more than 75% of all FHA mortgagors were first-time homebuyers in 2009 -- representing nearly half all first-time homebuyers last year. Expecting that the FHA will continue to play a pivotal role in the mortgage market in fiscal year 2011, Stevens requested a combined mortgage insurance commitment limitation of $420bn in fiscal year 2011 for new FHA loan commitments, as well as $88m for housing counseling assistance, an increase from $400bn in fiscal year 2010. With the surge in lending, there has been considerable concern about the FHA insurance program’s ability to cover approved lenders against default-related losses. Stevens testified that while the FHA holds more than 4.5% of total insurance-in-force in reserves — $31bn set aside specifically to cover losses over the next 30 years — its capital reserve account has decreased too quickly. Despite this, Stevens told the subcommittee FHA is “not the next subprime.” Stevens told the subcommittee the FHA is implementing new measures to ensure its stability, including increasing lender enforcement, restructuring FHA mortgage insurance premiums and installing a chief risk officer. However, Andrew Caplin, a New York University economist and co-director of the Center for Experimental Social Science, warned the subcommittee Stevens’ optimism may be inflated due to a “failure to keep track of streamline refinances.” Caplin testified that FHA-insured mortgage delinquencies and modifications are ignored and unemployment is inadequately captured. He added many mortgages that were significantly underwater, which traditionally do not prepay, suddenly seemed to start to prepay, the result of the FHA’s poor record keeping. Caplin said FHA reform proposals must begin with changes to the FHA’s risk assessment practices and called on the FHA to expand public access to its book of business, “in the spirit of transparency.” Mortgage Bankers Association (MBA) president John Courson said his group supports many of the FHA’s reform efforts, including a request to fund an upgrade of the FHA “antiquated technology” and hiring additional staff. “We need to redouble our efforts to make certain FHA gets this needed funding,” he said. However, Courson warned the subcommittee that proposals to implement an across-the-board increase to the down payment requirements, instead of just raising it for low credit-score borrowers, “would have a chilling effect on the ability of FHA to meet the credit needs of the borrowers it serves.” Other MBA concerns include the proposal to reduce seller concessions limits and Courson called on the FHA to reexamine its Technology Open to Approved Lenders (TOTAL) Scorecard underwriting system to review the thoroughness of the program’s borrower risk assessment capabilities. Graciela Aponte, legislative analyst for the Wealth-Building Policy Project at the National Council of La Raza (NCLR), a non-profit advocacy group for the Hispanic community, testified that the inability to obtain credit is hurting the potential homeowners in the Latino community and slowing the progress in restoring stability and ownership opportunities. “An effective FHA mortgage insurance program should fill the gaps in the private home loan market through direct participation and by driving innovation in origination and loss mitigation procedures while also remaining fiscally sound,” Aponte said. “By shoring up local housing markets, the FHA program can directly contribute to the stabilization of the national economy.” Aponte called for more effective underwriting standards that are not only faster, but ensure borrowers are qualified for the mortgages they obtain. In addition, she said her group was “disappointed” the FHA did not reinstate the pre-purchase housing counseling requirement for first-time homebuyers. Write to Austin Kilgore.