Risks remain for FHA insurance fund, Donovan says

Despite the unprecedented efforts of the administration to alter the trajectory of the Federal Housing Administration, considerable risks remain, Housing and Urban Development Secretary Shaun Donovan said.

Appearing before the Senate Banking Committee, Donovan said the agency’s fund will return to the federally mandated capital reserve ratio of 2% by 2015. He estimated the agency will have sufficient balances to cover all projected losses without triggering a bailout, echoing remarks FHA Commissioner Carole Galante told the House.

The FHA will add $8 billion to its capital reserve account in 2013.

“Thanks to our efforts, I can say confidently that FHA is moving in another direction, and that the long term outlook for FHA and the fund are now much better than they were in 2009,” Donovan said.

On Monday, HUD announced a series of premium changes that Donavan claimed will boost receipts to FHA by $1 billion in fiscal years 2012 and 2013, beyond the receipts already included in the President Barack Obama’s budget submission.

The FHA’s Mutual Mortgage Insurance Fund has two components: The financing account, which holds money to accommodate expected 30-year losses on the agencies’ insured portfolio, and the capital reserve account, holds an additional amount equal to 2% of the insurance in force.

Since 2009, the ratio has been well below the mandate, falling to 0.24%. The administration’s budget office predicted that the FHA would need a nearly $700 million bailout by Sept. 30.

Donovan refuted that prediction, saying it does not include the added revenue from increased premiums and the proceeds from the recently announced settlements with FHA-approved lenders. Bank of America (BAC) will pay $1 billion to settle harm done to the agency by mortgage originator Countrywide.

He cited a tightening of risk controls, increased premiums and expanded usage of loss mitigation assistance as efforts by the administration that “have led to the highest quality of loans FHA has seen in its history.”

Edward Pinto, a fellow at the American Enterprise Institute and head of FHA Watch, is a harsh critic of the agency. Pinto said the additional premium increase beyond the mandate is a positive step toward reducing what he says is the FHA’s “unfair competition” with private mortgage insurers. However, more must be done to rein in the expanding volume of both the FHA and USDA loans with down payments of 20% or more, he said.

At the hearing, Donovan said the FHA will gradually pull itself from the market to generate more private capital.

“We must not forget that it is playing an absolutely critical role today, ensuring access to capital in an environment when capital is extremely difficult to come by,” he added.

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