HFSC Hearing with HUD Secretary Castro
House Financial Services Commitee
“The Future of Housing in America:
Oversight of the Federal Housing Administration”
Wednesday, February 11, 2015
Key Topics & Takeaways
- Reduced Premiums: Chairman Jeb Hensarling decried the FHA’s decision to reduce premiums on its mortgage insurance as part of a “race to the bottom” with the FHFA to be the nation’s largest subprime lender.
- FHA Capital Reserve: Republicans criticized the FHA for lowering premiums despite the agency’s capital ratio being less than a quarter of the two percent statutory mandate.
- Underwriting Standards: Castro defended the FHA’s underwriting standards against Republican criticisms that they put taxpayers at risk and crowd out the private sector.
Witness
- Julian Castro, Secretary, Department of Housing and Urban Development
Opening Statements
In his opening statement, Chairman Jeb Hensarling (R-Texas) said this is the second hearing (after Federal Housing Finance Agency (FHFA) Director Mel Watt testified in January) examining what some view as the Administration’s “taxpayer-paid race to the bottom” between the FHFA and the Federal Housing Administration (FHA) to become the nation’s biggest subprime lender. He said cuts to FHA premiums and down payment requirements “cannot be allowed to stand” and that the government should not help put people into homes they cannot afford to keep.
In her opening statement, Ranking Member Maxine Waters (D-Calif.) credited the FHA for providing opportunity to over 34 million first-time low-income homebuyers over its 50 year existence. She then thanked the FHA for responding to calls to reduce annual mortgage insurance premiums because this will provide relief to millions of families. She pointed out that when the private sector “abandoned” the housing market during the financial crisis, it was the FHA that stepped in to fill the gap. She credited the agency for generating revenue and taking critical steps to restore its capital reserves, commenting that the FHA is far from bankrupt.
Rep. Blaine Luetkemeyer (R-Mo.) was very critical of the FHA and the Department of Housing and Urban Development (HUD), noting that Secretary Julian Castro has called the agency’s trajectory strong, but calling this optimism “novel.” He stated that the FHA holds just a quarter of its statutorily required capital, and that much of this came from a taxpayer bailout. All this, Luetkemeyer said, creates a “false sense of security” about the FHA’s financial health, all while the agency is lowering premiums and pushing private sector companies out of the market.
Rep. Emanuel Cleaver (D-Mo.) was more complimentary of the FHA, saying it has played an important role in aiding first-time homebuyers and will play a crucial role as the housing market continues to heal from the crisis, by filling the “gaping cavity” left behind by private lenders.
Witness Testimony
In histestimony, Secretary Julian Castro of the Department of Housing and Urban Development said the FHA has been instrumental in the reemergence of housing as an engine of economic prosperity. However, he said “the numbers show” that the costs facing families are still too high and so the FHA has taken action by reducing premiums on mortgage insurance in hopes of encouraging more new borrowing.
Castro said the FHA is in a strong position to take such action, especially given its improved underwriting standards, and that the FHA is now making money. He also talked about the Mutual Mortgage Insurance Fund, saying the FHA is on track to reach the required 2 percent level for capital reserves, and said the agency is now focusing on acting to fulfill its responsibility of providing access to credit for responsible borrowers.
Question and Answer
Insurance Fund Capital Reserve
Hensarlingquestioned Castro regarding the FHA’s current capital reserve ratio. Hensarling stated that the FHA is required by law to have a two percent capital reserve level and asked Castro if he agreed that the FHA was in violation of the law since the current level is below two percent. Castro stated that FHA is working towards the two percent level and expects to be there by 2017.
Rep. Mick Mulvaney (R-S.C.) asked Castro when was the last time the FHA was compliant with the requirement and expressed dismay that the expected compliance date continues to be pushed out further. Castro stated that the FHA has not been compliant for about five years.
Rep. Keith Ellison (D-Minn.) asked how the two percent capital requirement compares to other federal lending programs. Castro said no other federal agency has such a requirement
Rep. Denny Heck (D-Wash.) stated that the FHA’s statute says the agency can make adjustments to its fund if it determines that it is not meeting its operational goals of providing wider access to credit. He also acknowledged the legal obligation of keeping a two percent capital reserve. He said it appears the FHA is simply trying to balance two possibly conflicting obligations. Castro agreed with the sentiment.
Reducing Premiums
Rep. Carolyn Maloney (D-N.Y.) asked for clarification on how the FHA decided on the 50 basis point rate reduction. Castro stated that the reduction finds a good balance between risk reduction and increased lending to borrowers. Maloney asked if the FHA believes the reduction is adequate to cover the risk being posed, Castro stated he believes that it does.
Waters asked Castro how much the average borrower will save due to the recent premium reduction. Castro stated the average borrower will save $900 annually and that over next two years a total of two million borrowers will save about $2 billion dollars.
Rep. Ed Royce (R-Calif.) asked Castro if he agrees that more private capital is needed in housing finance, to which Castro replied that he does. Royce then followed up by questioning whether reducing premiums would run counter to this principle. Castro answered that there does seem to be “overlap” there, but that he does not believe the reduced premiums will have a significant impact on private insurers.
With regard to the recent decision by the FHA to offer loans for as little as three percent down, Rep. Scott Garrett (R-N.J.) expressed concern that current FHA lending practices are actually predatory lending. Garret directly asked if the FHA is a predatory lender. Castro stated that the FHA is a responsible lender with strong underwriting and that the premium reduction does not change who qualifies for a loan. Castro stated that the FHA has increased safeguards to ensure that borrowers are not given loans they cannot afford.
Rep. Robert Pittenger (R-N.C.) pointed out that Castro said numerous times that he believes the FHA is not a bank. He asked whether the practices of the FHA should be commensurate with the practices of the private market. Castro agreed that prudent measures must be taken to ensure financial health of the agency.
Pittenger said the footprint of the government is very heavy and commented that it seems to him that lowering premiums is just setting the FHA up for failure, while making it difficult for the private market to attract the same individuals. Castro said the FHA serves a unique market and that the agency is on a
“much more solid footing” than a few years ago.
QRM and QM
Rep. Sean P. Duffy (R-Wis.) asked Castro why the FHA is exempt from the Qualified Residential Mortgage (QRM) rule. Duffy questioned why the FHA should not have to follow QRM if it is good for everyone else. Castro stated that FHA already has strong underwriting requirements and thought that FHA loans should be excluded from the requirement.Rep. Bill Huizenga (R-MI) also pressed Castro concerning the FHA’s QRM exempt status. Huizenga stated that if the rule is if good enough for community banks then it should be good enough for the FHA.
Rep. Andy Barr (R-Ky.) asked how many FHA loans would comply with the Qualified Mortgage (QM) rule from the Consumer Financial Protection Bureau (CFPB) if they were not all statutorily exempted, and whether the FHA believes it has a better methodology than the QM rule. Castro said only that the agency was told to come up with a separate process and followed the statute, but that the FHA maintains strong underwriting standards.
FHAs Role
Rep. Roger Williams (R-Texas) expressed his belief that less government is a good thing and that he believes in competition. He stated that the FHA business model “scares me” as it relies on increasing volume but without requiring sufficient margin. He asked if Castro thinks the FHA should be run like a private insurance company. Castro answered that the FHA has had profound success as a government agency and that any judgment is a matter of whether or not you believe in its fundamental mission.
Rep. Juan Vargas (D-Calif.) said the FHA has played an important countercyclical role and noted that the agency has taken criticism from some for lowering premiums and from others for not lowering them enough. Castro acknowledged the criticisms on both sides of argument and said its decision making is consistent with both statutory obligations and its historic mission.
Rep. Scott Tipton (R-Colo.) said the FHA’s traditional responsibility is to provide access to credit and play a countercyclical role in the market and asked if this is still the mission. Castro agreed.
Tipton followed up by pointing out, however, that the FHA has about 50 percent of the market share for mortgage insurance. He repeated Castro’s statement that the FHA has just had its two most profitable years and asked if it is trying to get more business by lowering premiums. Castro said getting more business is not the driver, but rather focus is on the need to have a strong insurance fund and providing everyday Americans access to credit. He would not comment on what the “proper share” for the FHFA would be in a normalized market, saying decisions will be based on strengthening the fund and ensuring access.
Rep. Bruce Poliquin (R-Maine) continued Tipton’s line of questioning, noting that FHA has a significant market share with a taxpayer backstop. He questioned “how big” Castro wants the FHA to get. Poliquin stated that the FHA’s mission statement claims that the organization operates with fiscal accountability but doubted this fits with a government organization that controls half the mortgage insurance market behind a taxpayer backstop. He criticized the FHA as a classic example of a large government entity crowding out the private sector.
For more information on this hearing, please click here.
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House Financial Services Commitee
“The Future of Housing in America:
Oversight of the Federal Housing Administration”
Wednesday, February 11, 2015
Key Topics & Takeaways
- Reduced Premiums: Chairman Jeb Hensarling decried the FHA’s decision to reduce premiums on its mortgage insurance as part of a “race to the bottom” with the FHFA to be the nation’s largest subprime lender.
- FHA Capital Reserve: Republicans criticized the FHA for lowering premiums despite the agency’s capital ratio being less than a quarter of the two percent statutory mandate.
- Underwriting Standards: Castro defended the FHA’s underwriting standards against Republican criticisms that they put taxpayers at risk and crowd out the private sector.
Witness
- Julian Castro, Secretary, Department of Housing and Urban Development
Opening Statements
In his opening statement, Chairman Jeb Hensarling (R-Texas) said this is the second hearing (after Federal Housing Finance Agency (FHFA) Director Mel Watt testified in January) examining what some view as the Administration’s “taxpayer-paid race to the bottom” between the FHFA and the Federal Housing Administration (FHA) to become the nation’s biggest subprime lender. He said cuts to FHA premiums and down payment requirements “cannot be allowed to stand” and that the government should not help put people into homes they cannot afford to keep.
In her opening statement, Ranking Member Maxine Waters (D-Calif.) credited the FHA for providing opportunity to over 34 million first-time low-income homebuyers over its 50 year existence. She then thanked the FHA for responding to calls to reduce annual mortgage insurance premiums because this will provide relief to millions of families. She pointed out that when the private sector “abandoned” the housing market during the financial crisis, it was the FHA that stepped in to fill the gap. She credited the agency for generating revenue and taking critical steps to restore its capital reserves, commenting that the FHA is far from bankrupt.
Rep. Blaine Luetkemeyer (R-Mo.) was very critical of the FHA and the Department of Housing and Urban Development (HUD), noting that Secretary Julian Castro has called the agency’s trajectory strong, but calling this optimism “novel.” He stated that the FHA holds just a quarter of its statutorily required capital, and that much of this came from a taxpayer bailout. All this, Luetkemeyer said, creates a “false sense of security” about the FHA’s financial health, all while the agency is lowering premiums and pushing private sector companies out of the market.
Rep. Emanuel Cleaver (D-Mo.) was more complimentary of the FHA, saying it has played an important role in aiding first-time homebuyers and will play a crucial role as the housing market continues to heal from the crisis, by filling the “gaping cavity” left behind by private lenders.
Witness Testimony
In histestimony, Secretary Julian Castro of the Department of Housing and Urban Development said the FHA has been instrumental in the reemergence of housing as an engine of economic prosperity. However, he said “the numbers show” that the costs facing families are still too high and so the FHA has taken action by reducing premiums on mortgage insurance in hopes of encouraging more new borrowing.
Castro said the FHA is in a strong position to take such action, especially given its improved underwriting standards, and that the FHA is now making money. He also talked about the Mutual Mortgage Insurance Fund, saying the FHA is on track to reach the required 2 percent level for capital reserves, and said the agency is now focusing on acting to fulfill its responsibility of providing access to credit for responsible borrowers.
Question and Answer
Insurance Fund Capital Reserve
Hensarlingquestioned Castro regarding the FHA’s current capital reserve ratio. Hensarling stated that the FHA is required by law to have a two percent capital reserve level and asked Castro if he agreed that the FHA was in violation of the law since the current level is below two percent. Castro stated that FHA is working towards the two percent level and expects to be there by 2017.
Rep. Mick Mulvaney (R-S.C.) asked Castro when was the last time the FHA was compliant with the requirement and expressed dismay that the expected compliance date continues to be pushed out further. Castro stated that the FHA has not been compliant for about five years.
Rep. Keith Ellison (D-Minn.) asked how the two percent capital requirement compares to other federal lending programs. Castro said no other federal agency has such a requirement
Rep. Denny Heck (D-Wash.) stated that the FHA’s statute says the agency can make adjustments to its fund if it determines that it is not meeting its operational goals of providing wider access to credit. He also acknowledged the legal obligation of keeping a two percent capital reserve. He said it appears the FHA is simply trying to balance two possibly conflicting obligations. Castro agreed with the sentiment.
Reducing Premiums
Rep. Carolyn Maloney (D-N.Y.) asked for clarification on how the FHA decided on the 50 basis point rate reduction. Castro stated that the reduction finds a good balance between risk reduction and increased lending to borrowers. Maloney asked if the FHA believes the reduction is adequate to cover the risk being posed, Castro stated he believes that it does.
Waters asked Castro how much the average borrower will save due to the recent premium reduction. Castro stated the average borrower will save $900 annually and that over next two years a total of two million borrowers will save about $2 billion dollars.
Rep. Ed Royce (R-Calif.) asked Castro if he agrees that more private capital is needed in housing finance, to which Castro replied that he does. Royce then followed up by questioning whether reducing premiums would run counter to this principle. Castro answered that there does seem to be “overlap” there, but that he does not believe the reduced premiums will have a significant impact on private insurers.
With regard to the recent decision by the FHA to offer loans for as little as three percent down, Rep. Scott Garrett (R-N.J.) expressed concern that current FHA lending practices are actually predatory lending. Garret directly asked if the FHA is a predatory lender. Castro stated that the FHA is a responsible lender with strong underwriting and that the premium reduction does not change who qualifies for a loan. Castro stated that the FHA has increased safeguards to ensure that borrowers are not given loans they cannot afford.
Rep. Robert Pittenger (R-N.C.) pointed out that Castro said numerous times that he believes the FHA is not a bank. He asked whether the practices of the FHA should be commensurate with the practices of the private market. Castro agreed that prudent measures must be taken to ensure financial health of the agency.
Pittenger said the footprint of the government is very heavy and commented that it seems to him that lowering premiums is just setting the FHA up for failure, while making it difficult for the private market to attract the same individuals. Castro said the FHA serves a unique market and that the agency is on a
“much more solid footing” than a few years ago.
QRM and QM
Rep. Sean P. Duffy (R-Wis.) asked Castro why the FHA is exempt from the Qualified Residential Mortgage (QRM) rule. Duffy questioned why the FHA should not have to follow QRM if it is good for everyone else. Castro stated that FHA already has strong underwriting requirements and thought that FHA loans should be excluded from the requirement.Rep. Bill Huizenga (R-MI) also pressed Castro concerning the FHA’s QRM exempt status. Huizenga stated that if the rule is if good enough for community banks then it should be good enough for the FHA.
Rep. Andy Barr (R-Ky.) asked how many FHA loans would comply with the Qualified Mortgage (QM) rule from the Consumer Financial Protection Bureau (CFPB) if they were not all statutorily exempted, and whether the FHA believes it has a better methodology than the QM rule. Castro said only that the agency was told to come up with a separate process and followed the statute, but that the FHA maintains strong underwriting standards.
FHAs Role
Rep. Roger Williams (R-Texas) expressed his belief that less government is a good thing and that he believes in competition. He stated that the FHA business model “scares me” as it relies on increasing volume but without requiring sufficient margin. He asked if Castro thinks the FHA should be run like a private insurance company. Castro answered that the FHA has had profound success as a government agency and that any judgment is a matter of whether or not you believe in its fundamental mission.
Rep. Juan Vargas (D-Calif.) said the FHA has played an important countercyclical role and noted that the agency has taken criticism from some for lowering premiums and from others for not lowering them enough. Castro acknowledged the criticisms on both sides of argument and said its decision making is consistent with both statutory obligations and its historic mission.
Rep. Scott Tipton (R-Colo.) said the FHA’s traditional responsibility is to provide access to credit and play a countercyclical role in the market and asked if this is still the mission. Castro agreed.
Tipton followed up by pointing out, however, that the FHA has about 50 percent of the market share for mortgage insurance. He repeated Castro’s statement that the FHA has just had its two most profitable years and asked if it is trying to get more business by lowering premiums. Castro said getting more business is not the driver, but rather focus is on the need to have a strong insurance fund and providing everyday Americans access to credit. He would not comment on what the “proper share” for the FHFA would be in a normalized market, saying decisions will be based on strengthening the fund and ensuring access.
Rep. Bruce Poliquin (R-Maine) continued Tipton’s line of questioning, noting that FHA has a significant market share with a taxpayer backstop. He questioned “how big” Castro wants the FHA to get. Poliquin stated that the FHA’s mission statement claims that the organization operates with fiscal accountability but doubted this fits with a government organization that controls half the mortgage insurance market behind a taxpayer backstop. He criticized the FHA as a classic example of a large government entity crowding out the private sector.
For more information on this hearing, please click here.