U.S. lawmakers mulled over the differences between loans backed by the Federal Housing Administration and private insurers Wednesday, noting that FHA continues to put taxpayers at risk.
Members of Congress raised these questions during a House Financial Services Committee hearing on the private mortgage insurance market.
Rep. Randy Neugebauer, R-TX, firmly believes FHA is in the business of insurance. But, he questioned the consistency of the FHA’s most basic principles of insurance, specifically its Mutual Mortgage Insurance Fund, which could put taxpayers on the hook for another government bailout, he said.
"FHA does not evaluate its risk according to actuarial principles; it does not correlate premiums to risk; it does not spread its risk in a manner supported by its financial resources; and it relies on treating poor results as a quarantined anomaly," Neugebauer said.
The FHA’s most recent actuarial report showed its MMI Fund capital-reserve ratio falling to negative 1.44%, well below the Congressional-mandated minimum of 2%.
While an FHA bailout is presumed likely to some, House panelists were confident FHA’s $30 billion in reserves is enough to cover any potential losses. If that's true, it means the agency will not have to dip into taxpayer funds in the near future.
Given this consensus, Rep. Mike Capuano, D-Mass., amplified the need for his fellow representatives to assist taxpayers by pushing for enactment of House Bill 1028, which is the 'End Unnecessary Borrowing Act of 2013'.
The bill would ensure the MMI Fund only draws from the Treasury to pay mortgage insurance claims that are mandated as part of its mission. Simply put, it would eliminate exposing taxpayers to additional expenditures. Specifically, the legislation would prevent a draw on MMI funds just to meet capital ratio requirements, according to the bill.
While both Neugebauer and Capuano firmly agreed that the FHA plays a significant role in the mortgage insurance realm, they sided with the panelists that an appropriate balance between private insurers and the FHA is in order — at least until the FHA returns to its mission of assisting distressed borrowers.
"There is a proper role for FHA in the housing finance market, but I believe it should be a complement to the private market, not a direct competitor," Neugebauer said.