As you know, FHA has provided a critically important source of mortgage credit during this economic recovery particularly for underserved communities—and I will build upon the strong foundation of reforms initiated by the administration and continue the three fundamental priorities we have focused on since President Obama took office.
First, stabilizing the housing market and assisting homeowners at risk of foreclosure. Second, protecting FHA's fiscal health and strengthening risk management. And third, ensuring responsible access to credit and liquidity as we work with Congress to bring private capital back to the market and build a 21st century housing finance system.
But of course, the job's not over and our housing market and economy remain fragile. That's why I'm pleased to share my views on the draft legislation.
And I want to commend the subcommittee for three provisions in particular. The first is its proposal to increase access to credit by supporting small lending institutions, such as community banks, that participate in FHA programs but are not able to close FHA loans in their own names.
Second, we are also pleased that the legislation would extend FHA's ability to hold all lenders to the same enforcement standard for loans that were improperly originated, or in which fraud or misrepresentation were involved. FHA's current indemnification authority covers those lenders responsible for 70% of FHA loan volume, but the time has come to hold all underwriting lenders to the same standard—and with this legislation we will.
And last, the legislation provides explicit authority to terminate lenders for poor performance in specific geographic areas or on a nationwide basis. Such flexibility will ensure that we can protect the FHA from lenders whose poor performance puts the taxpayer at risk.
I would, however, like to call your attention to several provisions that the Administration looks forward to working with you to refine.
The first is the proposal to create separate capital reserve accounts for the general and special risk insurance funds through which we provide financing for the FHA multifamily and healthcare loan guarantee programs, among others.
Even though we agree that FHA must manage risk to these portfolios with the same focus and urgency as we treat the single-family fund, FHA is concerned that the creation of new capital reserve requirements as detailed in the discussion draft would be unworkable because they would apply the current requirements for the MMI Fund to funds that have very different risk characteristics and structures, and that contain a mix of existing and legacy programs. And so, we look forward to working with the subcommittee to determine an alternative means to increase transparency and appropriately manage the risk associated with the GI and SRI funds.
In addition, we are particularly concerned about the legislation's proposal to increase the minimum down payment for all FHA borrowers to five percent. If this had been required during the past year, 345,000 families could have been shut out of the opportunity to become homeowners.
Our experience during this crisis has shown that the combination of downpayment and FICO score is a far better predictor of loan performance than either of these components alone. We believe it is essential to retain the flexibility to respond to market and loan performance conditions with a variety of tools rather than being locked in to a specific down payment structure.
And last, while my colleague from USDA will specifically address the rural components of the draft, let me simply say that we are already working very closely together in aligning the agencies' rental programs through a White House Rental Policy Working Group that includes HUD, USDA and Treasury. And having initiated a similar conversation on the single-family side as well, we believe it makes sense to continue focusing for now on those efforts, rather than contemplating a more extensive reordering of the various federal agencies' roles in these programs, as outlined in the legislation.
And so, I look forward to working with this subcommittee to refine this legislation, and to address a number of other significant issues important to the department—one of which is the methodology used to determine loan limits, which warrants further discussion and analysis given that it appears it could dramatically lower FHA loan limits in some places. I look forward to working with you to ensure that FHA can continue to fulfill its mission of supporting our housing market and economic recovery while minimizing risk to the taxpayer.
Carol Galante is the acting FHA commissioner.
