House Republicans are looking to make major reforms to the Federal Housing Administration single-family program to reduce losses and return FHA to its original mission.
“FHA has strayed from its original mission,” according to House Financial Services Committee chairman Jeb Hensarling, R-Texas.
“It doesn’t just focus on low- and moderate-income Americans; it provides mortgage insurance for expensive homes valued as high as $729,000,” the new chairman said at a hearing last week.
The committee heard testimony from several academics and analysts that specialize in housing finance.
They served up numerous recommendations to improve FHA’s underwriting standards and fix the financially strapped federal mortgage fund.
These recommendations ranged from basing FHA eligibility on median income (instead of housing prices) to fine tuning FHA’s underwriting so claims don’t exceed 6%.
One recommendation that seemed to gain some attention at the hearing involved making the FHA program more like the Department of Veterans Affairs single-family loan program.
VA has run a successful single-family program by guaranteeing just 25% to 50% of the loan amount. FHA guarantees 100% of the loan amount and its default rate is twice the VA rate. (FHA’s serious delinquency rate is 9.5%.)
If Congress reduced the FHA guarantee level to 30%, it would put the lender at risk, according to a Basil Petrou, a managing partner at Federal Financial Analytics.
On a $100,000 loan, FHA would take the hit for the first $30,000 in losses, and the lender would be on the hook for the rest.
It would discipline underwriting, reduce loan losses and provide an avenue for recapitalizing the FHA Mutual Mortgage Insurance fund, Petrou told the committee.
“Cutting the level of insurance coverage on future FHA loans while holding the FHA premium at its current level would recapitalize the FHA fund,” Petrou testified.
In calendar year 2012, lenders originated $232.4 billion in FHA single-family loans and $129 billion in VA loans.
Petrou expected several industry groups would immediately condemn the VA proposal. But several groups contacted by NMN indicated they are keeping an open mind and will discuss it with their members. One group said they need to do an analysis of the proposal.
At the hearing, Rep. Michael Capuano, D-Mass., said he likes the concept.
“The concept of someone having 'skin in the game’ is a good concept. But I need to know what it does to interest rates,” he added.
If the mortgage rate goes up 20%, “that means you are kicking out a whole lot of people” who normally qualify for FHA-insured loans.
One mortgage expert told NMN that the VA concept would push up rates since the lender is taking on more risk.
But Petrou disagrees. He pointed out that FHA and VA loans are securitized via Ginnie Mae. And the pricing of Ginnie-guaranteed mortgage-backed securities would have more impact on rates than the guarantee level.
However, the financial consultant acknowledged that Ginnie should be given the flexibility to increase its guarantee fee if the FHS guarantee level is reduced. Ginnie Mae currently charges issuers a 6 basis point guaranty fee.
House Financial Services Committee members want to pass reforms this year now that FHA has exhausted all its capital. Many expect FHA will have to turn to the U.S. Treasury for help this year. FHA is “flat broke,” Hensarling said.
In mid-March, President Obama is slated to send his annual budget proposal to Congress and it might show FHA needs a draw from the Treasury.
“We have overwhelming evidence that reforms are needed,” said Rep. Gary Miller, R-Calif. He wants to ensure the FHA program is better managed so it can continue to provide homeownership opportunities for creditworthy borrowers. “Some have proposed making the FHA program work more like the VA program. We should consider the pros and cons of these, and other, alternative approaches for the FHA product. They could help reduce the taxpayer exposure from the FHA program,” Miller said.
