HFSC on FHA ‘s $1.7 Billion Taxpayer Bailout
AT
OCTOBER 20TH’S HOUSE FINANCIAL SERVICES COMMITTEE hearing entitled “Federal Housing
Administration: Implications of a $1.7 billion Taxpayer Bailout,” lawmakers
questioned Carol Galante, Commissioner of the Federal Housing Administration
(FHA), about the Agency’s $1.68 billion mandatory appropriation from the U.S.
Treasury.
Opening
Remarks
Chairman
Jeb Hensarling
(R-Texas.), in his opening
remarks, stated that the FHA is “officially bail out broke” and that its
mandatory appropriation from the Treasury adds to the “greatest existential
threat facing the nation” by adding to the national debt. He noted that the
Congressional Budget Office (CBO) found that “the FHA misstated its projected
recovery” and that “mortgages insured by FHA over the past two decades have had
a net cost of $15 billion, even though initial estimates from FHA suggested $45
billion in profits.”
Hensarling
added that this situation “reinforces the need” for the Protecting American
Taxpayers and Homeowners (PATH) Act to put the FHA on “sound financial
footing,” shift risk to the private sector, and return the FHA to its mission
of serving first-time home buyers and low to moderate income borrowers.
Ranking
Member Maxine Waters
(D-Calif.) commended the work done by the FHA in its countercyclical role and
in providing an affordable pathway for home ownership to first-time homebuyers.
She noted that the Agency has increased the health of its mortgage insurance
fund by raising premiums, strengthening down payments, and increasing
enforcement. Waters added that the accounting transfer from the Treasury does
not reflect an updated view of the insurance fund or fiscal health of the FHA.
Witness
Testimony
Carol
Galante,
in her testimony,
stated that while she would have preferred to avoid the appropriation from the
Treasury, the transfer does not signal a failure of the FHA model. She
explained that the appropriation is the result of a “static assessment in the
budget process” based on calculations from 2012 and that these assumptions are
now outdated and do not account for improvement in loan performance or recovery
rates.
Galante
said the housing market was crippled by “reckless practices of private actors”
and that there was a “clear and significant impact” of loans made during the
run-up to the financial crisis that negatively affected the legacy portfolio
books at the FHA. She added that if it were not for the Home Equity Conversion
Mortgage (HECM) program, the capital reserve level would be positive by $3.5
billion. She continued that future books of business will be stronger and that
new books are performing well, after the FHA took aggressive steps including
raising premiums and tightening credit.
Galante
suggested that the FHA be given the “right tools” to protect the insurance
fund, including 1) indemnification authority for direct endorsement lenders; 2)
authority to terminate origination and underwriting approval; 3) revising the
compare ratio requirement; 4) authority to direct servicing; and 5) reducing
barriers to timely risk management.
Galante
concluded by noting that the FHA has been reducing its footprint in the
marketplace and that “no one is more concerned” about ensuring the agency is on
the path to rebuilding their capital reserves than she is.
Question
and Answer
Hensarling began the question
and answer segment by asking why the testimony presented was credible when
previous testimony from the FHA have been “so wrong for so long.” Galante
replied that her testimony is based on the results of independent actuaries and
added that the outlook for the fund should improve when 2013 receipts are added
in.
Waters,
Hensarling and Randy Neugebauer (R-Texas) asked Galante to explain what the FHA
has done to improve its financial state, including replenishing its two percent
capital reserve ratio. Galante said that the agency focused on tightening
the credit box so that future loans are “the best they can be.” She also said
the Agency has worked hard to replenish its capital reserve ratio by increasing
premiums and changing policies, but noted that the FHA was only able to raise
premiums in 2010 after being granted authority from Congress. Galante
added, however, that there is a balance to be found between capitalizing the
fund and restricting access to credit.
Rep.
Lynn Westmoreland
(R-Ga.) asked how long it would take the FHA to return to their required two
percent capital reserve ratio, to which Galante replied it will likely take
until 2017.
Rep.
Carolyn Maloney
(D-N.Y.) asked if the Federal Housing Finance Agency (FHFA) goes ahead with
their plan to lower the loan limits of Fannie Mae and Freddie Mac “on its own,
without input from Congress,” would the FHA be forced to also lower their loan
limits. Galante said that the FHA’s loan limits are set to expire on January 1,
2014, when they will decrease to $625,000.
Garrett asked Galante if she
believed the FHA was being honest with the American people and Congress and
what the worst-case scenario losses would be under the actuarial study.
Galante replied that she believed the FHA has been honest in reporting
independent studies and tracking performance and said the worst-case scenario
would result in a negative net worth of $65 billion.
Garrett
pointed out that a study by the Federal Reserve showed that the worst case
scenario would result in a negative net worth of $115 billion. Galante
said that the Fed’s stress tress and this study were done for different
purposes and the Fed’s stress test was deemed “not appropriate” for their
projections by the independent actuary.
Rep.
Gregory Meeks
(D-N.Y.) said that “if anything” the FHA “should be given praise” as the
housing market “would have destroyed the country” without their actions, adding
that the FHA assists 40-50 percent of African-American and Latino home buyers.
He then asked what has changed with the FHA’s business model since 2009.
Galante replied that her Agency has: made changes to the reverse mortgage
program; continues investigations and enforcement from lenders who brought
fraudulent loans; and has been “doing everything possible” to increase recovery
on legacy portfolio loans.
Rep.
Patrick McHenry
(R-N.C.) expressed concern that the FHA accepts “subprime” loans with FICO
scores of 550 and said that under the qualified residential mortgage (QRM)
definition, these would not be permitted. Galante said that FICO scores are
just one piece of the review process, but noted that scores under 580 require a
10 percent down payment.
Rep.
Bill Huizenga
(R-Mich.) expressed concern with the FHA’s market “footprint” and that its
outsized role is putting “taxpayers on the hook.” Galante replied that
the FHA’s market share has declined and continues to do so, noting that the FHA
insured 1.3 million loans in 1999 and 1.29 million in 2009.
Rep.
Mick Mulvaney
(R-S.C.) raised the issue of eminent domain, saying that the FHFA has “taken an
aggressive position on this” as it “presents a clear threat” to the operations
of Fannie Mae, Freddie Mac, and Federal Home Loan Banks, while also running
contrary to the goals of Congress. He then asked why the Department of Housing
and Urban Development (HUD) and the FHA have not taken similar positions on the
issue. Galante replied that the FHA “continues to monitor the situation” but
that the FHFA is in a different position as Fannie and Freddie own some of the
securities at risk of being seized under the program, while the FHA “only
insures for its own book of business.” Galante added that eminent domain is a
local and state government authority.
Rep.
Brad Sherman
(D-Calif.) expressed concern that lowering loan limits would harm his
constituents who face a higher cost of living and could cause home prices to
decline. He then asked what the use of eminent domain would do for the solvency
of Fannie and Freddie. Galante replied that the “eminent domain is a local
tool” but that she would be happy to issue guidance on this issue if it is
necessary.
Rep.
Dennis Ross
(R-Fla.) asked if there is sufficient private capital in the market so that the
FHA can return to a market share of around two percent. Galante said there is a
challenge to getting enough private capital to return as the entire market has
shrunk. She noted that the FHA historically accounts for 10-15 percent of the
market, was only at two percent during the ramp-up to the crisis, and is
currently at 12-13 percent of the market.
Rep.
Edward Royce
(R-Calif.) also asked for Galante to make a statement of her views on the use
of eminent domain. Galante reiterated that the FHA believes that “eminent
domain authority in general is a local and state authority” and that any
decisions need to be played out over time to see what impacts there would be on
lending.
Royce
continued by asking if the FHA insurance fund “can be counted on or not” and if
the FHA will help refinance mortgages reinsured through the eminent domain
process. Galante said she does not know what the FHA will be asked to do and
they do not know “what the various programs will look like at a given time.”
She added that the FHA will issue additional guidance if needed.
Rep.
Steve Stivers
(R-Ohio) asked why the FHA has not introduced risk based pricing yet, to which
Galante replied that “the way we do pricing and risk based underwriting is in
the best interest of the borrowers” and their access to credit.
For
more information on this hearing and to view a webcast, please click here.
,Blog Tags:,Blog Categories:,Blog TrackBack:,Blog Pingback:No,Hearing Summaries Issues:Housing,Hearing Summaries Agency:House Financial Services Committee,Publish Year:2013
AT
OCTOBER 20TH’S HOUSE FINANCIAL SERVICES COMMITTEE hearing entitled “Federal Housing
Administration: Implications of a $1.7 billion Taxpayer Bailout,” lawmakers
questioned Carol Galante, Commissioner of the Federal Housing Administration
(FHA), about the Agency’s $1.68 billion mandatory appropriation from the U.S.
Treasury.
Opening
Remarks
Chairman
Jeb Hensarling
(R-Texas.), in his opening
remarks, stated that the FHA is “officially bail out broke” and that its
mandatory appropriation from the Treasury adds to the “greatest existential
threat facing the nation” by adding to the national debt. He noted that the
Congressional Budget Office (CBO) found that “the FHA misstated its projected
recovery” and that “mortgages insured by FHA over the past two decades have had
a net cost of $15 billion, even though initial estimates from FHA suggested $45
billion in profits.”
Hensarling
added that this situation “reinforces the need” for the Protecting American
Taxpayers and Homeowners (PATH) Act to put the FHA on “sound financial
footing,” shift risk to the private sector, and return the FHA to its mission
of serving first-time home buyers and low to moderate income borrowers.
Ranking
Member Maxine Waters
(D-Calif.) commended the work done by the FHA in its countercyclical role and
in providing an affordable pathway for home ownership to first-time homebuyers.
She noted that the Agency has increased the health of its mortgage insurance
fund by raising premiums, strengthening down payments, and increasing
enforcement. Waters added that the accounting transfer from the Treasury does
not reflect an updated view of the insurance fund or fiscal health of the FHA.
Witness
Testimony
Carol
Galante,
in her testimony,
stated that while she would have preferred to avoid the appropriation from the
Treasury, the transfer does not signal a failure of the FHA model. She
explained that the appropriation is the result of a “static assessment in the
budget process” based on calculations from 2012 and that these assumptions are
now outdated and do not account for improvement in loan performance or recovery
rates.
Galante
said the housing market was crippled by “reckless practices of private actors”
and that there was a “clear and significant impact” of loans made during the
run-up to the financial crisis that negatively affected the legacy portfolio
books at the FHA. She added that if it were not for the Home Equity Conversion
Mortgage (HECM) program, the capital reserve level would be positive by $3.5
billion. She continued that future books of business will be stronger and that
new books are performing well, after the FHA took aggressive steps including
raising premiums and tightening credit.
Galante
suggested that the FHA be given the “right tools” to protect the insurance
fund, including 1) indemnification authority for direct endorsement lenders; 2)
authority to terminate origination and underwriting approval; 3) revising the
compare ratio requirement; 4) authority to direct servicing; and 5) reducing
barriers to timely risk management.
Galante
concluded by noting that the FHA has been reducing its footprint in the
marketplace and that “no one is more concerned” about ensuring the agency is on
the path to rebuilding their capital reserves than she is.
Question
and Answer
Hensarling began the question
and answer segment by asking why the testimony presented was credible when
previous testimony from the FHA have been “so wrong for so long.” Galante
replied that her testimony is based on the results of independent actuaries and
added that the outlook for the fund should improve when 2013 receipts are added
in.
Waters,
Hensarling and Randy Neugebauer (R-Texas) asked Galante to explain what the FHA
has done to improve its financial state, including replenishing its two percent
capital reserve ratio. Galante said that the agency focused on tightening
the credit box so that future loans are “the best they can be.” She also said
the Agency has worked hard to replenish its capital reserve ratio by increasing
premiums and changing policies, but noted that the FHA was only able to raise
premiums in 2010 after being granted authority from Congress. Galante
added, however, that there is a balance to be found between capitalizing the
fund and restricting access to credit.
Rep.
Lynn Westmoreland
(R-Ga.) asked how long it would take the FHA to return to their required two
percent capital reserve ratio, to which Galante replied it will likely take
until 2017.
Rep.
Carolyn Maloney
(D-N.Y.) asked if the Federal Housing Finance Agency (FHFA) goes ahead with
their plan to lower the loan limits of Fannie Mae and Freddie Mac “on its own,
without input from Congress,” would the FHA be forced to also lower their loan
limits. Galante said that the FHA’s loan limits are set to expire on January 1,
2014, when they will decrease to $625,000.
Garrett asked Galante if she
believed the FHA was being honest with the American people and Congress and
what the worst-case scenario losses would be under the actuarial study.
Galante replied that she believed the FHA has been honest in reporting
independent studies and tracking performance and said the worst-case scenario
would result in a negative net worth of $65 billion.
Garrett
pointed out that a study by the Federal Reserve showed that the worst case
scenario would result in a negative net worth of $115 billion. Galante
said that the Fed’s stress tress and this study were done for different
purposes and the Fed’s stress test was deemed “not appropriate” for their
projections by the independent actuary.
Rep.
Gregory Meeks
(D-N.Y.) said that “if anything” the FHA “should be given praise” as the
housing market “would have destroyed the country” without their actions, adding
that the FHA assists 40-50 percent of African-American and Latino home buyers.
He then asked what has changed with the FHA’s business model since 2009.
Galante replied that her Agency has: made changes to the reverse mortgage
program; continues investigations and enforcement from lenders who brought
fraudulent loans; and has been “doing everything possible” to increase recovery
on legacy portfolio loans.
Rep.
Patrick McHenry
(R-N.C.) expressed concern that the FHA accepts “subprime” loans with FICO
scores of 550 and said that under the qualified residential mortgage (QRM)
definition, these would not be permitted. Galante said that FICO scores are
just one piece of the review process, but noted that scores under 580 require a
10 percent down payment.
Rep.
Bill Huizenga
(R-Mich.) expressed concern with the FHA’s market “footprint” and that its
outsized role is putting “taxpayers on the hook.” Galante replied that
the FHA’s market share has declined and continues to do so, noting that the FHA
insured 1.3 million loans in 1999 and 1.29 million in 2009.
Rep.
Mick Mulvaney
(R-S.C.) raised the issue of eminent domain, saying that the FHFA has “taken an
aggressive position on this” as it “presents a clear threat” to the operations
of Fannie Mae, Freddie Mac, and Federal Home Loan Banks, while also running
contrary to the goals of Congress. He then asked why the Department of Housing
and Urban Development (HUD) and the FHA have not taken similar positions on the
issue. Galante replied that the FHA “continues to monitor the situation” but
that the FHFA is in a different position as Fannie and Freddie own some of the
securities at risk of being seized under the program, while the FHA “only
insures for its own book of business.” Galante added that eminent domain is a
local and state government authority.
Rep.
Brad Sherman
(D-Calif.) expressed concern that lowering loan limits would harm his
constituents who face a higher cost of living and could cause home prices to
decline. He then asked what the use of eminent domain would do for the solvency
of Fannie and Freddie. Galante replied that the “eminent domain is a local
tool” but that she would be happy to issue guidance on this issue if it is
necessary.
Rep.
Dennis Ross
(R-Fla.) asked if there is sufficient private capital in the market so that the
FHA can return to a market share of around two percent. Galante said there is a
challenge to getting enough private capital to return as the entire market has
shrunk. She noted that the FHA historically accounts for 10-15 percent of the
market, was only at two percent during the ramp-up to the crisis, and is
currently at 12-13 percent of the market.
Rep.
Edward Royce
(R-Calif.) also asked for Galante to make a statement of her views on the use
of eminent domain. Galante reiterated that the FHA believes that “eminent
domain authority in general is a local and state authority” and that any
decisions need to be played out over time to see what impacts there would be on
lending.
Royce
continued by asking if the FHA insurance fund “can be counted on or not” and if
the FHA will help refinance mortgages reinsured through the eminent domain
process. Galante said she does not know what the FHA will be asked to do and
they do not know “what the various programs will look like at a given time.”
She added that the FHA will issue additional guidance if needed.
Rep.
Steve Stivers
(R-Ohio) asked why the FHA has not introduced risk based pricing yet, to which
Galante replied that “the way we do pricing and risk based underwriting is in
the best interest of the borrowers” and their access to credit.
For
more information on this hearing and to view a webcast, please click here.