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Earlier this week, we blogged about the upcoming House Financial Services Committee hearing featuring U.S. Department of Housing and Urban Development (HUD) Secretary Julian Castro. The hearing, titled The Future of Housing in America: Oversight of the Federal Housing Administration, was directed towards the financial status of the Federal Housing Administration (FHA), the condition of the Mutual Mortgage Insurance Fund (MMIF), and recent initiatives to promote affordable housing.
Wednesday’s hearing echoed the same opposition that was present at the January 27 House Financial Services Committee hearing that called on Federal Housing Finance Agency (FHFA) Director Mel Watt to testify.
In his testimony, Castro provided an overview of the Federal Housing Administration (FHA) and answered a barrage of questions from the Committee.
MMIF Value
Addressing the below-mandated capital reserve ratio of the Mutual Mortgage Insurance Fund (MMIF), Castro stated “The value of the Fund is positive and has grown $21 billion in value in the last two years. It gained nearly $6 billion in value over the previous year and now stands at $4.8 billion in economic value. The current capital ratio is .41 percent and we have over $46 billion in available cash to pay claims.”
Regardless of improvement, the percentage still remains well below the federally-mandated two percent minimum. Many Committee members used this critical piece of information as a basis for their criticism against the FHA.
Rep. Jeb Hensarling (R-TX) countered Castro’s statement with the facts: with a ratio below the mandated minimum of two percent, HUD is not in compliance with the law. Other members of the Committee were in agreement with Rep. Hensarling.
Reduction of FHA Premiums
The lowering of FHA mortgage insurance premiums has been a topic of heated discussion ever since its announcement in early January.
“FHA’s historically high premiums were limiting affordability for our borrowers and this almost certainly discouraged some first time homebuyers from entering the market,” said Castro.
The recent reduction will lower mortgage insurance premiums to 0.85 percent, down from 1.35 percent. Committee members such as Rep. Mia Love (R-UT) voiced her contention with the decision.
Although the reduced premiums would make the act of purchasing a home more affordable, it brings up an important question: What happens after the home is purchased?
Rep. Love questioned Castro on how homeowners will maintain their payments to avoid defaulting. Castro was unable to comment directly on the effects of lowering premiums but reiterated improved default rates and delinquency statistics.
Underwriting Standards
“FHA’s strong underwriting standards remain in place, and borrowers must demonstrate an ability to repay their loan. This measured reduction in premiums is possible because FHA has also worked hard to strengthen its own finances to ensure it can serve future generations,” said Castro.
For every statement of Castro’s testimony, there seemed to be an opposing point from the Committee. In regards to the FHA’s strong underwriting standards, Rep. Steve Pearce (R-NM) provided the following personal anecdote:
“I participated in my first year in making an award from some department in HUD that allowed a young woman to move into a home in Anthony, New Mexico. Anthony is predominantly a poor community so it was nice to have the help there. Several years later she caught me at a town hall and said, ‘Do you remember coming to my house? You actually helped move boxes out of the trucks.’ I said, ‘I do remember that,’” Pearce said. “She said, ‘I was sort of led into that by this free money from the government.’ She said, ‘What I did was I put my money down, I bought a house that I could not afford because I just wanted to believe that I could do it.’ She said, ‘I ended up losing the whole thing. Everything I owned went with it.’ That’s what we do in the sense of fairness. That’s what we do when we do not have adequate underwriting standards, when we don’t bother to take a look at if people can make the payments or if they can’t.”
Other members quickly seized the opportunity to expand on the sentiment of Rep. Pearce. However, Castro focused on the FHA’s informed reasoning.
“This new premium level is sufficient to account for risk while still improving affordability and facilitating access for responsible, creditworthy borrowers. Our estimates show that this premium change will not alter FHA’s positive trajectory and will not materially lengthen the amount of time it will take for FHA to return to the mandatory two percent capital reserve ratio, considering loan volume and improved risk profiles.”
Final Thoughts
The tone throughout the hearing was tense but Castro maintained his resolve concluding his testimony with the following statement: “Our Nation is smart enough to heed the lessons of the past without forsaking our future. The answer isn’t to stop supporting homeownership—it’s to do it right. FHA is on track and well positioned to continue its 80 year history of creating opportunities for hard-working Americans.”