David G. Kittle, CMB, chairman of the Mortgage Bankers Association (MBA), testified before the House Financial Services Subcommittee on Housing and Community Opportunity at a hearing titled, "The Future of the Federal Housing Administration's Capital Reserves: Assumptions, Predictions and Implications for Homebuyers." Below is Mr. Kittle's oral statement to the subcommittee, as prepared for delivery.
"Thank you, Chairwoman Waters.
"MBA greatly appreciates the continued attention this subcommittee has focused on FHA. We are here today because after withering on the vine for so much of this decade, FHA is back and is now insuring upward of a third of the mortgage market. FHA is serving as a vital source of liquidity during the current downturn. And it was this Committee, working on a truly bipartisan basis, that helped pave the way for FHA's resurgence with the passage of last year's landmark Housing and Economic Recovery Act.
"Today, amidst much good news about FHA's renaissance, there is also cause for concern, which is what brings us here this afternoon. FHA's capital reserve ratio has dropped to a dangerous new low, and some are starting to wonder whether taxpayers will be required to step in and - dare I say - bail out FHA.
"So I think it would be beneficial to first examine why FHA is at a crossroads.
"Like the rest of the mortgage finance industry, FHA has not been immune from the economic disruptions that have roiled the entire housing sector. A rapidly rising unemployment rate has led more FHA borrowers to fall behind on their mortgages, while plummeting home prices have resulted in more foreclosures and greater losses on each property. Add to that FHA's mission, which is to help borrowers who are underserved by the markets - those with lower incomes, less than stellar credit, or insufficient downpayments.
"The result is that 13.7 percent of FHA loans are past due, with a foreclosure rate of just under 3 percent. As more loans mature, and if the current trends in employment and home prices are not quickly reversed, we anticipate both of those figures to increase, placing FHA in even greater peril.
"So what do we do about it? We can sit back and hope for the best. Or we can be proactive and take the necessary steps to build a more solid foundation so FHA can continue to fulfill its important mission of opening doors to affordable homeownership.
"MBA has put forward a comprehensive agenda that will build on the important reforms contained in HERA.
"First, Congress needs to appropriate the funding it authorized under HERA for FHA's staffing and technology needs. Allowing FHA to hire additional staff to keep up with its growing loan volume is good management. And it's a step we can take right away. FHA makes money for the federal government - it should be allowed to use some for its own staffing and technology needs. And FHA should be permitted to compensate its staff at the same pay scales used by other federal financial regulators like the FDIC and the SEC.
"I want to commend this committee for shepherding through the full House HR 3146, the 21st Century FHA Housing Act, which authorizes up to $72 million annually for FHA. Now we need to redouble our efforts to make certain this money is appropriated.
"Second, we need to improve the quality of FHA originations. One way to protect the soundness of FHA is to ensure that the mortgage lenders and mortgage brokers who participate in the program and originate FHA-insured mortgages have the competence and wherewithal to protect consumers and taxpayers from undue loss.
"At MBA, we strongly believe that rigorous licensing and registration requirements, as well as net worth and minimum bonding requirements, are essential components of any protective framework. We continue to support increased net worth and bonding requirements for mortgage bankers and brokers. Net worth requirements serve to assure that a originator has a stake in the industry.
"Third, Congress needs to make permanent the higher loan limits that would otherwise expire at the end of December. While it may seem counterintuitive at first, higher balance loans actually perform better than those at the lower end of the spectrum. They require higher downpayments and bring in higher premiums. And they are essential to ensuring the availability of financing in many areas of the country where there are no other options.
"Chairwoman Waters, I would like to close on a personal note. I have been in the mortgage business and working with FHA insured loans since 1978. I bought my first house with an FHA mortgage. I have seen the highs and I have seen the lows and I've never given up on FHA.
"MBA's members understand the value of FHA and we are committed to making sure the agency weathers the current downturn. We stand ready to work with this committee, as well as the very capable leadership at HUD, to take the necessary steps to protect and strengthen its important programs."
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