HFSC Hearing on FHA Oversight
House Financial Services Subcommittee on Housing and Insurance
“Oversight of the FHA – Part II”
Thursday, February 26, 2015
Key Topics & Takeaways
- Private Capital: Panelists expressed the view that private capital will have difficulty competing with the FHA, especially in light of the recent premium reduction.
- Housing Counseling: Panelists and Committee members expressed the view that housing counseling should be employed on a wider basis to help borrowers understand the specifics and financial obligations of mortgage loans.
- Capital Reserve Ratio: As in prior FHA hearings, panelists and Committee members weighed in on the fact that FHA’s capital ratio is less than a quarter of the two percent statuary mandate.
Speakers
- Dr. Douglas Holtz-Eakin, President, American Action Forum
- Mr. Rohit Gupta, President and Chief Executive Officer, US Mortgage Insurance, Genworth and Co-chair, U.S. Mortgage Insurers
- Ms. Julia Gordon, Director of Housing Finance and Policy, Center for American Progress
- Dr. Clifford Rossi, Professor-of-the-Practice and Executive-in-Residence, Robert H. Smith School of Business, University of Maryland and Chief Economist of Radian Group Inc.
Witness Testimony
In his testimony, Dr. Douglas Holtz-Eakin, President, American Action Forum, focused on the Federal Housing Administration (FHA) capital reserve ratio and FHA’s recent reduction in premiums. He stated that the premium reduction will have an adverse impact on the quality of FHA’s portfolio, and that the decision to reduce premiums was done in a rapid fashion. He argued that such an important decision should not be made in only nine business days. Holtz-Eakin concluded by stating that the hasty decision highlights the need to perform a comprehensive revision of FHA and the GSEs.
In his testimony, Rohit Gupta, President and Chief Executive Officer, US Mortgage Insurance, Genworth and Co-chair, U.S. Mortgage Insurers, focused his remarks on the role of private mortgage insurers not only during the housing crisis but also today. Gupta stated that the mortgage insurer business model builds capital in good markets and that capital is then used to offset any risk in weak markets. He stated the need for a single industry standard on the Qualified Mortgage rule and a single industry standard for permissible seller concessions.
In her testimony, Julia Gordon, Director of Housing Finance and Policy, Center for American Progress, expressed the view that FHA is currently well-positioned and believes that FHA has measures in place to successfully mitigate risk. She stated that FHA’s most recent books of business will likely perform better than any books of business in the agency’s history, yet critics continue to insist that it engages in risky, predatory lending.
Gordon stated that more should be done to encourage and enable housing counseling for borrowers. She highlighted that in recent years, FHA has worked to balance its mission of supporting homeownership with its obligation to protect the insurance fund in a dynamic environment. She stated that the recent recalibration of the premium will help ensure that FHA continues to be available to the under-served borrowers that most need it.
In his testimony, Dr. Clifford Rossi, Professor-of-the-Practice and Executive-in-Residence, Robert H. Smith School of Business, University of Maryland and Chief Economist of Radian Group Inc., expressed concerns with FHA’s risk model and risk model assumptions.
Rossi stated there are flaws in the mortgage volume model used to project future FHA loan volume. According to him, the flaws in the model have significant consequences for the actuarial results and the model depends on projections of the credit risk profile based on borrower Fair Isaac Corporation (FICO) score and loan-to-value (LTV) ratio of future FHA loans. Dr. Rossi stated, “unfortunately, these figures should be, but are not, supplied by an actuary or some other independent source. Instead they come from the Department of Housing and Urban Development (HUD) itself.”
Question and Answer
Capital Level and Premium Reduction
Chairman Blaine Luetkemeyer (R-Mo.) asked the panelists what FHA needs to do to get back to where it should be in terms of its capital level. Gupta and Dr. Holtz-Eakin both agreed that premium reduction will not allow FHA to meet the required capital level. Gupta stated that “everyone” else has increased capital reserve ratios and so should FHA. Holtz-Eakin stated that FHA has exposed taxpayers to more risk and has not taken steps to improve its capital ratio.
Rep. Daniel T. Kildee (D-Mich.) asked Gordon who benefits from the premium reduction. Gordon stated that borrowers on the fringe benefited the most. She expanded by stating that there were several who could not afford the down payment prior to the reduction, but can afford the reduced down payment.
Rep. Bob Dold (R-Ill.) asked if the panelists believed FHA is following the law (regarding the fact it is below its required capital levels). Only Gordon expressed the view that FHA was not breaking the law with a lower-than-required capital level.
Dold next asked what should be done by FHA to comply with the letter of the law. Rossi stated that premiums should not be lowered and that FHA should stick to its mission of lending to lower income borrowers only.
Impediments to Private Capital
Rep. Dennis A. Ross (R-Fla.) asked panelists what gets in the way of private capital. Rossi stated that the private market does a much better job pricing risk than the government, but FHA is allowed to play by a different set of rules than private firms. Gupta said private lenders are unable to lend to borrowers with FICO scores that are under 620 at rates that are competitive with FHA.
Principle Reduction
During the questioning, Gordon stated that principle reduction should be used as a loan modification tool. Rep. Lynn A. Westmoreland (R-Ga.) asked Gordon about principle reduction and who would pay the difference when a loan is sold at reduced principle. Gordon stated that FHA would.
Housing Counseling
Rep. Al Green (D-Texas) asked panelists their view on housing counseling for borrowers. All panelists agreed that housing counseling has valuable. However, Gupta stated that his firm has always offered housing counseling and will continue to but he has not found that counseling has any impact on the ability of a borrower to repay.
Kildee asked Gupta to expand on his views concerning housing counseling. Gupta said, “I support it and think it is good, but have not seen a performance difference.” Kildee disagreed and said the quality of counseling is most important thing.
For more information on this event, please click here.
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House Financial Services Subcommittee on Housing and Insurance
“Oversight of the FHA – Part II”
Thursday, February 26, 2015
Key Topics & Takeaways
- Private Capital: Panelists expressed the view that private capital will have difficulty competing with the FHA, especially in light of the recent premium reduction.
- Housing Counseling: Panelists and Committee members expressed the view that housing counseling should be employed on a wider basis to help borrowers understand the specifics and financial obligations of mortgage loans.
- Capital Reserve Ratio: As in prior FHA hearings, panelists and Committee members weighed in on the fact that FHA’s capital ratio is less than a quarter of the two percent statuary mandate.
Speakers
- Dr. Douglas Holtz-Eakin, President, American Action Forum
- Mr. Rohit Gupta, President and Chief Executive Officer, US Mortgage Insurance, Genworth and Co-chair, U.S. Mortgage Insurers
- Ms. Julia Gordon, Director of Housing Finance and Policy, Center for American Progress
- Dr. Clifford Rossi, Professor-of-the-Practice and Executive-in-Residence, Robert H. Smith School of Business, University of Maryland and Chief Economist of Radian Group Inc.
Witness Testimony
In his testimony, Dr. Douglas Holtz-Eakin, President, American Action Forum, focused on the Federal Housing Administration (FHA) capital reserve ratio and FHA’s recent reduction in premiums. He stated that the premium reduction will have an adverse impact on the quality of FHA’s portfolio, and that the decision to reduce premiums was done in a rapid fashion. He argued that such an important decision should not be made in only nine business days. Holtz-Eakin concluded by stating that the hasty decision highlights the need to perform a comprehensive revision of FHA and the GSEs.
In his testimony, Rohit Gupta, President and Chief Executive Officer, US Mortgage Insurance, Genworth and Co-chair, U.S. Mortgage Insurers, focused his remarks on the role of private mortgage insurers not only during the housing crisis but also today. Gupta stated that the mortgage insurer business model builds capital in good markets and that capital is then used to offset any risk in weak markets. He stated the need for a single industry standard on the Qualified Mortgage rule and a single industry standard for permissible seller concessions.
In her testimony, Julia Gordon, Director of Housing Finance and Policy, Center for American Progress, expressed the view that FHA is currently well-positioned and believes that FHA has measures in place to successfully mitigate risk. She stated that FHA’s most recent books of business will likely perform better than any books of business in the agency’s history, yet critics continue to insist that it engages in risky, predatory lending.
Gordon stated that more should be done to encourage and enable housing counseling for borrowers. She highlighted that in recent years, FHA has worked to balance its mission of supporting homeownership with its obligation to protect the insurance fund in a dynamic environment. She stated that the recent recalibration of the premium will help ensure that FHA continues to be available to the under-served borrowers that most need it.
In his testimony, Dr. Clifford Rossi, Professor-of-the-Practice and Executive-in-Residence, Robert H. Smith School of Business, University of Maryland and Chief Economist of Radian Group Inc., expressed concerns with FHA’s risk model and risk model assumptions.
Rossi stated there are flaws in the mortgage volume model used to project future FHA loan volume. According to him, the flaws in the model have significant consequences for the actuarial results and the model depends on projections of the credit risk profile based on borrower Fair Isaac Corporation (FICO) score and loan-to-value (LTV) ratio of future FHA loans. Dr. Rossi stated, “unfortunately, these figures should be, but are not, supplied by an actuary or some other independent source. Instead they come from the Department of Housing and Urban Development (HUD) itself.”
Question and Answer
Capital Level and Premium Reduction
Chairman Blaine Luetkemeyer (R-Mo.) asked the panelists what FHA needs to do to get back to where it should be in terms of its capital level. Gupta and Dr. Holtz-Eakin both agreed that premium reduction will not allow FHA to meet the required capital level. Gupta stated that “everyone” else has increased capital reserve ratios and so should FHA. Holtz-Eakin stated that FHA has exposed taxpayers to more risk and has not taken steps to improve its capital ratio.
Rep. Daniel T. Kildee (D-Mich.) asked Gordon who benefits from the premium reduction. Gordon stated that borrowers on the fringe benefited the most. She expanded by stating that there were several who could not afford the down payment prior to the reduction, but can afford the reduced down payment.
Rep. Bob Dold (R-Ill.) asked if the panelists believed FHA is following the law (regarding the fact it is below its required capital levels). Only Gordon expressed the view that FHA was not breaking the law with a lower-than-required capital level.
Dold next asked what should be done by FHA to comply with the letter of the law. Rossi stated that premiums should not be lowered and that FHA should stick to its mission of lending to lower income borrowers only.
Impediments to Private Capital
Rep. Dennis A. Ross (R-Fla.) asked panelists what gets in the way of private capital. Rossi stated that the private market does a much better job pricing risk than the government, but FHA is allowed to play by a different set of rules than private firms. Gupta said private lenders are unable to lend to borrowers with FICO scores that are under 620 at rates that are competitive with FHA.
Principle Reduction
During the questioning, Gordon stated that principle reduction should be used as a loan modification tool. Rep. Lynn A. Westmoreland (R-Ga.) asked Gordon about principle reduction and who would pay the difference when a loan is sold at reduced principle. Gordon stated that FHA would.
Housing Counseling
Rep. Al Green (D-Texas) asked panelists their view on housing counseling for borrowers. All panelists agreed that housing counseling has valuable. However, Gupta stated that his firm has always offered housing counseling and will continue to but he has not found that counseling has any impact on the ability of a borrower to repay.
Kildee asked Gupta to expand on his views concerning housing counseling. Gupta said, “I support it and think it is good, but have not seen a performance difference.” Kildee disagreed and said the quality of counseling is most important thing.
For more information on this event, please click here.