FHA’s Fund Shortfall Response Inadequate, Senators Say
The Federal Housing Administration isn’t going far enough with plans to shore up its finances as it faces a projected $16.3 billion shortfall in its insurance fund, Senate Democrats and Republicans said today.
The government mortgage insurer announced last month it would raise premiums and sell off delinquent loans after disclosing it might need Treasury funds to balance its books for the first time in its 78-year history. Those and other actions the agency is taking might not be enough, senators including South Dakota Democrat Tim Johnson and Alabama Republican Richard Shelby said at a hearing of the Senate Banking Committee.
“If the administration’s actions and proposals will not be sufficient to restore FHA’s fiscal health, then I plan to work with my colleagues on both sides of the aisle on the Banking Committee to find a bipartisan way to make that happen,” said Johnson, chairman of the committee.
Shaun Donovan, secretary of the Department of Housing and Urban Development, said the agency’s actions might not cover the shortfall in testimony before the Senate panel.
“I cannot guarantee that FHA will not need a draw before the end of this fiscal year,” Donovan said. “I’m highly concerned about that possibility.”
The poor financial outlook in the actuarial report “reflects an expectation that FHA’s current pool of insured loans still has significant foreclosure and claim activity yet to occur,” he said.
The FHA is prepared to take some additional steps including making “blunt changes” to its reverse mortgage program on an interim basis to protect its finances, Donovan said. The agency is seeking legislative changes allowing new limits on the terms of such mortgages, which permit senior citizens to borrow against the equity in their homes.
Republicans called for the agency to inform Congress at the moment it needs financial aid and said they would introduce a bill requiring real-time disclosure of FHA finances if HUD officials don’t comply.
The FHA currently backs 15 percent of U.S. mortgages issued for home purchases. The agency provides liquidity to the housing market by insuring lenders against losses on loans with down payments as low as 3.5 percent. Lenders are made whole if the mortgages default.
News that the FHA doesn’t have enough money in its reserve account to cover all projected losses, as is legally required, has renewed calls from Republicans on Capitol Hill to shrink the government’s footprint in the mortgage market. Together, the FHA and U.S.-owned Fannie Mae (FNMA) and Freddie Mac (FMCC) guarantee more than 90 percent of U.S. home loans.
The FHA fund’s shortfall stems largely from loans in its $1.1 trillion portfolio that it insured as the housing bubble collapsed.
Lawmakers will be limited in what they can do in the near term to impose new requirements on the FHA. Before the end of the year, the Senate could vote on a bill approved overwhelmingly by the House in September, known as the FHA Emergency Solvency Act. The measure would establish a minimum premium, enable the FHA to suspend poorly performing lenders and increase its monitoring of delinquent loans, among other provisions.
House Republicans sent a letter to the Senate Banking Committee today calling for an immediate vote on the bill. HUD supports the bill, and Donovan urged the Senate to act on it.
Broader measures -- such reducing the maximum size of loans the FHA will insure, raising the minimum down payment for FHA- insured mortgages, or imposing new restrictions on buyers -- probably couldn’t be added to pending legislation by the end of the year, said lender consultant Brian Chappelle of Washington- based Potomac Partners.
“Those would be poison pills at this stage,” Chappelle said in an interview. Still, he said, “we’re going to have that debate next year, obviously.”
Whether the agency will need taxpayer aid will be determined in February after the White House completes a separate financial assessment for President Barack Obama’s budget proposal.
More than 17 percent of all FHA loans were delinquent in September, according to data on the agency’s website. The agency has lost $70 billion on loans it insured from fiscal years 2007 through 2009.
The House FHA bill is H.R. 4264.