|Federal Information & News Dispatch, Inc.|
Chairman Neugebauer, Ranking Member Capuano, and members of the Subcommittee; my name is
I am here to testify on behalf of the 1 million members of the National Association of REALTORS[TM]. We thank you for the opportunity to present our views on the importance of the
FHA is an insurance entity within the
History of FHA
When FHA was created by the 1934 National Housing Act, the primary goal of the Administration was to insure loans for home improvements n1. In the wake of the Great Depression, the nation's housing stock was crumbling. Houses were not being maintained or modernized and the result was a negative feedback loop of deteriorating living conditions and falling home prices. At the same time, painters, carpenters, landscapers, workers in the dozens of trades involved in making home improvements were without work. By creating an agency to insure small, private capital loans for home improvements, the federal government hoped to address these issues simultaneously.
While home improvement loans were the first listed aim of the National Housing Act of 1934 and the subject of the Act's first Title, the full scope of the law went further. According to the Report of the House Committee, the intent of the National Housing Act of 1934 was: "to improve Nation-wide housing standards, provide employment, and stimulate industry; to improve conditions with respect to home mortgage financing, to prevent speculative excess in new-mortgage investment, and to eliminate the necessity for costly second-mortgage financing, by creating a system of mutual mortgage insurance and by making provision for the organization of additional institutions to handle home financing . . ." n2
These goals were achieved not through small loans for home improvements, but through what would become the Act's more enduring legacy: mutual mortgage insurance. So from the beginning, FHA never made loans directly to consumers. Private lenders make FHA loans, and FHA insures the lender against loss. Authorized by Title II of the National Housing Act, FHA's mutual mortgage insurance sought to insure loans up to
A common misconception exists that the FHA mortgage insurance program was originally intended to only benefit low-income borrowers who could not afford a large down payment on a new home. While the original upper limit of
Of course, a
In a similar vein, the original loan-to-value ratio (LTV) limit for FHA mutual mortgage insurance was set at 80 percent. While this is a high down payment requirement today, it was considerably less than what lenders had previously required. Home loans prior to FHA had downpayment requirements as high as half the value of the home, and as a result the American homeownership rate in 1930 was below 50 percent. n14 Because FHA-insured loans were amortizing and thus inherently less risky for both borrower and lender, a lower down payment requirement was justifiable. When the last payment on the loan was made, the loan was paid off.
These changes proved very popular: nearly 60 percent of FHA-insured borrowers in 1937 had LTVs between 76 and 80 percent, a jump from 47 percent in the preceding year. n15 Indeed, the loosening of the down payment requirement proved successful enough for FHA to raise the loan to value ratio again in 1938 to 90 percent for some loans.
Over the next few decades, FHA continued to update a number of its core policies. In 1934, the loan term for FHA-insured loans was 20 years. By 1954, FHA had changed its loan term to 30 years, a term that is still in place today. While the original downpayment for FHA loans was 20 percent, it was lowered to 5 percent by 1950 and to 3 percent in 1961. This downpayment stayed in place for 47 years, until
Role of FHA During the Recent Housing Crisis FHA has sustained housing markets nationwide during the worst economic crisis of our lifetime. As private lenders fled and financial institutions went out of business, FHA remained in the market and provided insurance to more than 4 million families since 2008. In a time when many of the large private banks, investment firms, and other financial institutions have needed bailouts or have even collapsed, FHA has weathered the storm very well. FHA continues to have significant resources sufficient to pay 30 years' worth of expected claims on its portfolio, an amount 30 times more than that required of banks, which are only required by the
This recent period is not the first time FHA has played a counter-cyclical role. The FHA helped stabilize falling home prices and made it possible for potential homebuyers to get the financing they needed when recession prompted private mortgage insurers to pull out of oil producing states in the 1980s. According to HUD Secretary
Figure 1 n19
As private lending constricted (and in some markets, disappeared altogether), FHA's role in the market grew. As recently as 2006, FHA's share of the home mortgage market was down to 3 percent, as unscrupulous lenders lured FHA's traditional constituent to risky exotic mortgages with teaser rates and little to no underwriting criteria. As the housing market began to collapse, private lenders fled or went out of business. As is seen in Figure 1, FHA's share of the loan market began to grow, as the private market's share plummeted. This demonstrates the counter-cyclical role FHA plays in the market.
Instead, FHA continued to lend. From 2007-2009, FHA financing helped more than 1.8 million American become homeowners. Even more importantly, FHA helped stabilize housing prices in thousands of communities by providing access to home financing when few others would. A recent
Some have criticized FHA for the high foreclosure rate on loans it insured during the period of the crisis. It is true that these loans have had a serious impact on the health of the
No one can be expected to predict the job loss and other fallout a household may suffer from a recession. Federal Reserve Chairman
Loans insured by FHA require full documentation of borrower income and assets. During the height of the real estate bubble, FHA was marginalized while exotic mortgages such as stated-income loans and payment option adjustable rate mortgages became common practice. When the bubble burst, these subprime and often predatory loans were prohibited by the regulators, leaving the industry searching for a stable mortgage product. Lenders using FHA are required to examine an applicant's financial status including income, debts and obligations. Generally, the monthly mortgage payment may not exceed 31 percent of a borrower's gross income and 43 percent of all debt payments. n25 Borrowers are required to have a 3.5 percent downpayment and closing costs may not be considered part of this financial contribution.
Recognizing the impact foreclosure has on communities and homeowners, FHA offers several programs to minimize risk to the MMIF and help families facing financial hardship stay in their homes. FHA may offer a loan modification, special forbearance, a partial claim, or foreclose on the property. Loss mitigation programs are available for both forward and reverse mortgages insured by FHA. Payments by FHA to a lender through loss mitigation do not impact taxpayers or the federal budget because they are derived from insurance payments made by FHA borrowers.
FHA continues to play a significant role for first-time buyers and minorities. In 2012, 78 percent of the 700,000 purchase loans FHA insured were for first-time buyers. Since 2009, FHA has insured mortgages for more than 2.8 million first-time buyers. Were it not for FHA, these buyers would not be homeowners, and 2.8 million homes would still be on the market. This would have been devastating on our nation's economy. Half of African-American homebuyers and nearly the same percentage of Hispanic and Latino buyers who purchased in 2011 used FHA financing. Even in 2001, before the crisis, more than twice as many minority first-time buyers used FHA than a loan that was guaranteed by
Since the crisis, the quality of FHA borrowers has skyrocketed. The average FICO score of an FHA borrower in 2012 was 699. The average FICO score on denied FHA applications was 670. Less than 4 percent of all FHA borrowers in the first half of 2012 had credit scores below 620. Figure 4 illustrates that FHA's denials in 2012 are higher than loans accepted in prior years. This figure also demonstrates that private lending has constricted to the degree that borrowers with credit scores over 730 are now being denied access to conventional credit. This draws more borrowers to FHA.
Some have criticized FHA for lending to borrowers with such high credit scores. But if they are denied a loan in the private marketplace, where else can they turn? This is exactly FHA's role - to lend to the underserved. As hard as it is to believe, borrowers with credit scores below 760 may be underserved by the private market.
The private market is returning, albeit slowly. As Figure 1 demonstrated, FHA's market share is declining, as private lending tentatively re-enters the marketplace. PMI's business has increased by 60 percent over where it was in 2011, and 40 percent higher than in 2010 (Figure 5).
While economic conditions have limited private market participation, the regulatory and oversight landscape also has made lenders very wary of making home loans. Upfront charges for loans financed by the GSEs (called loan level pricing adjustments) and representation and warranty risks are significant factors. While lenders received clarity on new origination standards with the release of the qualified mortgage rule (QM) in January, fundamental changes to the structure of the secondary mortgage market are necessary before the role of the private market can be fully restored. Both the government and private sector issue mortgage-backed securities (MBS), which are bundles of mortgages sold to investors. Investors in privately-issued mortgage backed securities (PLS) experienced severe losses during the housing bust and questions have been raised about the quality of loans in the securities. As a result, since the housing downturn investors have favored MBS backed by
There has been much said about FHA's market share. To clarify, 15.8 percent of all people who purchase a home use FHA-insured financing. In recent years, the number of people paying cash for a home has increased. So when looking at all the people who use a mortgage to purchase a home, 26 percent of those buyers use FHA-insured financing. Most private lenders today require a 20 percent downpayment. For those who allow a smaller downpayment along with some kind of mortgage insurance, 44.6 percent of those loans are FHA-insured.
It is likely that FHA will need to borrow money from the Treasury this year, but it is important to look at why. FHA did not offer risky mortgage products. FHA did not engage in exotic underwriting. FHA did not have accounting problems or other unscrupulous behavior. Instead, FHA stepped in during our housing crisis, and provided access to mortgage credit to millions of responsible Americans who wanted to purchase homes. Many of the mortgages FHA entered into during the crisis were in declining markets. Lending in declining markets increases risk. However, had FHA not stepped in to fill that market void, our economy would still be far from recovered.
Although the Federal Credit Reform Act (FCRA) and FHA's 2 percent capitalization ratio may require FHA to borrow from the Treasury, that money will not actually be spent to pay claims. The actuarial study predicts that FHA has sufficient resources to pay 7-10 years' worth of claims right now - even with no future business. But the Treasury draw may be necessary to hold a reserve able to fully fund all claims over a 30-year period. In essence, FHA will simply be holding this money in reserve. This is money that the actuarial report says will be unnecessary by FY2014, when the FHA fund will return to self-sufficiency. Some have argued that such a requirement is a misuse of taxpayer money, when it is not needed to pay actual claims.
Another factor that has had a significant negative impact on FHA's mortgage insurance losses is the use of seller-funded down payment assistance. Downpayment assistance from the seller was never permitted by FHA, but in the 1990s, some organizations formed schemes to circumvent the widely accepted prohibition on seller-provided down payments by forming middle-man "charitable" organizations that funneled seller monies through to the buyer. As early as 1999, FHA proposed eliminating these loans. But FHA was unable to do so because of successful litigation to prohibit the ban. Finally, in 2008, FHA received legislative relief to prohibit these loans. However, the damage had been done. These loans reached a record default rate of 28 percent, and account for more than
Looking forward, the more recent books of business are of the highest quality in FHA history. The projected performance of the recent books of business (FY10-FY12) has improved steadily in the last three audits. Even the FY12 Actuarial Review shows the FHA reserve fund will be fully capitalized again in FY2014, and will reach the desired 2 percent capital reserves ratio by 2017, which is above and beyond the required 30 years' worth of reserves.
Responses from FHA
Over the past four years, FHA has made many administrative changes to mitigate risk. FHA has increased mortgage insurance premiums (MIP), implemented a credit score floor, required a greater downpayment for borrowers with lower credit scores, adopted a series of measures to increase lender responsibility and enforcement, and hired the agency's first Credit Risk Officer,.
FHA has increased its premiums five times in the last 4 years, to a now historic high level. Beginning
FHA has also instituted changes to low credit score borrowers. Borrowers with a credit score below 500 are not eligible for FHA-insured mortgage financing, and those borrowers with credit scores between 500 and 579 are required to make a larger 10 percent downpayment. FHA has also increased the downpayment (as well as imposed an additional premium increase) for borrowers with loans above
FHA's Role in Multifamily Markets
As in the single-family market, FHA's role in multifamily mortgage markets has never been more critical. More than one third of American families rent their homes, and keeping a sufficient supply of affordable rental housing is essential. Without the liquidity provided by FHA multifamily mortgage insurance, these markets would be stalled.
In recent years, FHA's role in the multifamily market has increased dramatically - nearly 4 times its size from just several years ago. As lenders remain slow to provide financing for construction loans, FHA is the primary source of construction for multifamily developers and owners. Again, this demonstrates FHA's ability to step up and fill the gap when private markets will not or cannot act.
FHA has implemented a number of new procedures and requirements for its multifamily loans. They have strengthened underwriting by changing ratios and increasing documentation. They have also implemented a number of oversight and risk-management provisions.
In response to the increased demand and the changes to the program, FHA's ability to meet the needs of developers to create affordable rental housing has been challenged. FHA is working hard to meet the new demands responsibly. We urge them to look for ways to continue to streamline procedures.
At the same time there are significant concerns about the level of commitment authority the multifamily insurance program has for FY13. FHA reached the 75% limit of its commitment authority to insure mortgages under the
NAR recognizes the challenges that FHA is facing today, and the concern about risk to taxpayers. We believe FHA has taken a number of significant steps to immediately replace their reserves - including increases to premiums, risk management controls and downpayment increases. We believe these changes are and will continue to make substantial improvements to the FHA loan program's financial condition. However, there are additional reforms that we believe will further enhance FHA loan programs and protect the availability of mortgage credit to millions of American families.
Some of the losses that the FHA mortgage insurance program has faced in the last decades stem from programs it knew were problematic, but were powerless to change. As early as 1999, FHA reported problems with the seller-funded downpayment assistance program, but it wasn't until it received Congressional relief in 2008 that it was able to halt the program. That delay increased these defaults. The recent concerns about the Home Equity Conversion Mortgage (HECM) program provide another example. FHA would like to modify and restrict the use of this program which is contributing to significant losses. But it cannot make those changes without a rigorous regulatory process that will take months, if not years.
We support legislation to provide FHA with flexibility to change program requirements when necessary to protect the Fund. These include greater flexibility on setting premiums, changing loan policies, and other program changes. We believe FHA should have to go through some public notice process for significant changes, but don't believe the Agency should have to go to
On a related note, there are sometimes emergency changes that the FHA mortgage insurance program could benefit from if it could move quickly, that today require the regulatory process or Congressional action. We believe that FHA should be given temporary emergency authority to make changes to conditions that are having an immediate negative impact on the Fund.
Risk Management Tools
FHA has made significant steps in lender oversight in the last several years. But there is more that can be done. We support legislation that provides FHA with authority to seek indemnification from direct endorsement (DE) lenders. Indemnification protects FHA from insurance claims where the lender is guilty of fraud, misrepresentation or noncompliance with applicable loan origination requirements. FHA currently has authority to require indemnification from lenders with
Today FHA has limited ability to terminate lender approval.
Risk Based Pricing
Over the years there have been a number of proposals for risk-based pricing for FHA-backed loans. We believe this must be done in a very careful way so as not to disturb the "mutual" focus of the insurance fund, but NAR does support the concept. We believe risk based pricing that considers the full range of a borrower's qualifications could benefit the fund and allow FHA to better price risk.
Operations and Management
FHA continues to have significant needs with respect to its financial management systems and information systems in general. The HUD Inspector General recently downgraded FHA's financial management system as a material weakness of the program. We strongly support additional resources towards this effort, to ensure that the FHA mortgage insurance program is operating efficiently and soundly.
Other Programmatic Proposals
There are a number of other proposals that have been suggested that NAR believes are worthy of additional discussion. Creating a risk-sharing model for FHA with private mortgage insurance companies is one such proposal. Such an idea, called
Some have suggested lowering the federal guarantee from 100%. Other federal programs - such as the VA home loan guaranty and the Section 502 Guaranteed Rural Housing Loan Program - have lower guarantee rates. But studies completed by GAO and others have noted tightening of credit and increasing costs as concerns with such a proposal. However, NAR is actively reviewing this idea.
While NAR does not currently support these proposals, we are analyzing these concepts and would benefit from additional information about them. We are specifically focusing on the impact on the future viability of the FHA program, housing consumers and real estate markets. We would very much like to be a part of any future discussion on these ideas.
Condominiums are often the only affordable option for first time home buyers. FHA updated the condominium rules in September of 2012, but we recommend additional changes that will provide greater liquidity to this sector of the real estate market without causing additional risk to the MMIF. We support enhancements and changes to the rules and limits relating to owner-occupancy, investor ownership, and delinquent home owner association (HOA) assessments.
NAR recommends elimination of the owner-occupancy ratio requirement for FHA condo mortgages. The GSEs do not have an occupancy ratio for condominium projects if the borrower is going to occupy the unit, which is the case for all FHA borrowers. Eliminating this requirement will allow more households looking for a principal residence to purchase condominiums, which are often more affordable, raise owner-occupancy levels, and stabilize these developments and their communities.
FHA should continue to provide additional flexibility on condominium recertification requirements and fidelity insurance coverage requirements. The existing rules place significant data and liability burdens on volunteer boards of condominium and homeowners associations and limit the stock of housing units available to FHA buyers.
n1 13 Wayne L. R. 651, 652 (1967)
n2 H.R. Rep. No. 1922, 73d Cong., 2d Sess. 1 (1934).
n3 First Annual Report of the
n4 Id. at 18
n5 15th Census of
n7 Third Annual Report of the
n9 Fourth Annual Report of the
n10 Fifth Annual Report of the
n11 Fourth Annual Report of the
n12 Fifth Annual Report of the
n13 Vandell, Kerry D. FHA Restructuring Proposals: Alternatives and Implications. Housing Policy Debate, Volume 6, Issue 2,
n14 15th Census of
n15 Fourth Annual Report of the
n16 The fund that retains FHA's single-family premiums and is used to pay lenders when insured loans default.
n17 Written Statement of
n18 GAO, FHA's Role in Helping People Obtain Home Mortgages,
n20 Zandi, Mark, Obama Policies Ended Housing Free Fall,
n22 Szymanoski, Edward; Reeder, William; Raman, Padmasini; and Comeau, John "The FHA Single-Family Insurance Program: Performaing a Needed Role in the Housing Finance Market", PD&R Working Paper No. HF-019,
n23 Speech by Federal Reserve Chairman
n24 CRS Report R40937,
n25 HUD 4155.1 4.F.2.B and HUD 4155.1 4.F.2.C
Read this original document at: http://financialservices.house.gov/UploadedFiles/HHRG-113-BA04-WState-GThomas-20130410.pdf
|Copyright:||(c) 2010 Federal Information & News Dispatch, Inc.|