Mortgage Bankers Association President and CEO David Stevens told a House Financial Services subcommittee yesterday that Congress should take a balanced approach toward the Federal Housing Administration that allows it to maintain its mission focus, while remaining fiscally sound over the long term.
“As Congress examines the need for further FHA reform, its goal should be to balance FHA’s risk mitigation with appropriate policies that allow responsible borrowers to have access to credit,” Stevens told the Financial Services subcommittee on Housing and Insurance. “If the pendulum swings too far in certain areas, such as lender enforcement, sustainable credit will be curtailed at a time when it is needed to support the housing market recovery.”
The hearing, Sustainable Housing Finance: Perspectives on Reforming the FHA, was the fourth examination of FHA’s future. It took place amid increasing concerns over the viability of the FHA Mutual Mortgage Insurance Fund; the most recent actuarial report capital on the fund said its reserve ratio fell to negative 1.44 percent; in the Obama Administration’s fiscal 2014 budget released today, HUD projected a budget shortfall of $943 billion, resulting in an Administration request for additional funding from the U.S. Treasury.
“FHA is not immune to the housing crisis; its mortgage portfolio is problematic to the point where their Insurance Fund is underwater, with negative equity,” said subcommittee Chairman Randy Neugebauer, R-Texas.
In his testimony (http://financialservices.house.gov/uploadedfiles/hhrg-113-ba04-wstate-dstevens-20130410.pdf), Stevens outlined three steps for Congress: restoring financial solvency; preserving FHA’s housing mission; and maintaining the agency’s countercyclical role.
“Congress and this Administration face the challenge of striking a balance among these three goals,” Stevens said. “Moreover, policymakers must decide whether FHA requires marginal changes to its current program to meet these goals or whether substantial changes to the program are required. Any decision regarding substantial, systemic changes, however cannot be done in a vacuum. Changes that shift the role of FHA within the housing finance system must be done with consideration of the current debate of the future of the GSEs. Adjustments in how the FHA, Ginnie Mae, Fannie Mae or Freddie Mac function within the system could greatly impact the operations, policies, or market share of the others. Prudent action is necessary in order to limit unintended consequences that could be detrimental to the entire U.S. economy.”
Stevens said FHA has never played such an important role in the housing market. “Today, it is the dominant source of mortgage finance for borrowers with low down payments and those without high incomes or inherited wealth,” he said. “Many of these are first-time homebuyers, young families looking to put down roots in a community, and a segment that must be served if we are going to grow our economy and sustain the housing recovery.”
Stevens noted since the onset of the housing crisis, when FHA's books “suffered like everyone else's,” the agency has taken a number of steps to address losses in its single-family portfolio, by raising mortgage insurance premiums, increasing down payment requirements for certain borrowers, eliminating the approval of loan correspondents, raising lender net worth requirements, re-examining reverse mortgage policies and establishing the Office of Risk Management.
“By making these changes, FHA has moved swiftly to protect taxpayers and the fund,” Stevens said. “The credit profile and performance of the 2010 to 2012 portfolios demonstrate the effects of these changes. For example, the average FHA credit score for 2011 was 696, up from a historical average closer to 650. More importantly, these books are projected to contribute significantly to the economic value of the MMI fund over the next several years.”
Stevens outlined several steps that Congress could take to further strengthen FHA and promote the return of private capital, including lowering loan limits from levels necessary at the height of the housing crisis; adjusting down payment requirements to mitigate for other risk factors, such as low credit scores; and creating prudent risk-sharing.
“Similarly, risk-based underwriting could further reduce FHA’s credit risk by targeting areas of risk layering,” Stevens said. “However, the consequences to FHA’s traditional borrowers on each of the above suggestions could be significant if FHA employs overly stringent credit controls. Finding the right balance will be critical. Many lenders in recent years have tightened their standards beyond FHA’s minimums. FHA may need to lock in some of these overlays as appropriate. This would protect FHA from any erosion in standards as market conditions evolve.”
Stevens cautioned, however, that going too far could upset the balance, noting that in recent FHA has increased its oversight and enforcement of agency-approved lenders.
Let me be clear: as FHA commissioner [2009-2011], I initiated tighter controls and enforcement procedures that shut down irresponsible FHA lenders,” Stevens said. “When warranted, this is certainly the right thing to do for the fund. The key is finding the proper tolerances and communicating them clearly to market participants. When lenders are forced to operate their businesses to near-perfect standards, they will operate well inside of the published standards.”
Stevens pointed out that credit is “far tighter” than anyone has experienced in decades. “There may be families with good credit willing to put down substantial down payments that are being frozen out of the market because the risks of making any mistake are too great--and the rules of the road are unclear--and often contradictory,” he said. “When lenders don't know whether FHA will demand indemnification or cancel the government guarantee, on top of the potential they may face substantial financial penalties because the goal posts have been moved, they will--quite naturally--only lend to people with perfect credit and limit financing options for FHA’s targeted population.”
Stevens reiterated MBA’s call for “certainty” in the real estate finance system. “We need a system where homeownership is a doorway to opportunity and borrowers can once again feel safe, confident and secure in their loans, but also a system that thrives in an environment that encourages a competitive, responsible marketplace so business can grow,” he said. “That includes not just FHA, but also examining the future of the entire housing finance system. Ultimately, all stakeholders want the same thing--a fully functioning market that relies most heavily on private capital, with a limited, appropriate role for federal programs. A stable, sustainable FHA program must be a part of that system.”