The House Financial Services Subcommittee on Insurance, Housing and Community Opportunity held a hearing on May 25th on the subject of reforming the Federal Housing Administration (FHA), the Rural Housing Service (RHS) and Ginnie Mae. The hearing, "Legislative Proposals to Determine the Future Role of FHA, RHS and GNMA in the Single- and Multi-Family Mortgage Markets," is part of the Financial Services Committee’s efforts to build a stronger housing finance system that seeks to protect taxpayers from future bailouts and encourages the private sector to re-enter the mortgage marketplace.
“The FHA, RHS, and Ginnie Mae play a major role in the mortgage finance market, and reform of these agencies is critical to restoring stability and strength to the housing sector," said Rep. Judy Biggert (R-IL). "The Subcommittee will explore reforms to improve their financial condition, enhance lender enforcement tools, and bring private sector capital back into the market. Our goal is to determine a future role for these government mortgage programs that strikes the right balance for taxpayers and homebuyers."
Witnesses who testified at the hearing included:
►Katie Alitz, president, Council for Affordable and Rural Housing
►Michael D. Berman, chairman, Mortgage Bankers Association
►Mark Calabria, director of financial regulation studies, Cato Institute
►Peter Carey, director of Self-Help Enterprises Inc.
►Brian Chappelle, partner, Potomac Partners
►Peter W. Evans, partner, Moran and Company
►Basil Petrou, managing partner, Federal Financial Analytics Inc.
►Ron Phipps, president, National Association of Realtors (NAR)
►Barry Rutenberg, first vice chairman, National Association of Home Builders (NAHB)
The hearing focused on a draft of the FHA-Rural Regulatory Improvement Act of 2011, to protect taxpayers, including giving HUD the authority to disqualify poor quality lenders from participating in the program; establishing an independent chief financial officer for Ginnie Mae and a new Deputy Assistant Secretary for Risk position at FHA; and requiring a five percent downpayment for all FHA loans. The RHS, under the discussion draft, would be moved to the U.S. Department of Housing & Urban Development (HUD) where its mission to serve rural areas would be strengthened using the housing expertise and financial tools available in the Department.
"By making it even more difficult for private capital to re-enter the housing finance market, the qualified residential mortgage (QRM) rule would lead to FHA being flooded with more, not fewer, loans. And while FHA has an important role to play, MBA firmly believes that it is not in the public interest for a government insurance program to dominate the market," said Berman, chairman of the MBA. "One of our primary concerns about the proposed QRM rule is the overemphasis on downpayment as an indicator of a risky loan. Likewise, we have similar apprehension about legislation to raise FHA's minimum downpayment to five percent.
The FHA insurance program was established in 1934 to insure mortgages made by private lending institutions. The program was intended to be self-funded. Mortgages backed by the FHA carry an explicit 100 percent government guarantee in the event a borrower defaults. The recent increase in delinquencies and foreclosures across the nation has had a detrimental impact on the financial health of the FHA. In November 2010, the annual actuarial report on FHA’s financial position found that the capital reserve ratio for the Mutual Mortgage Insurance Fund was 0.50 percent, well below the statutorily mandated level of two percent.
"Proposals to further increase FHA downpayment requirements are unwarranted,” said Phipps. “The current 3.5 percent downpayment and closing costs represent a significant financial commitment. Requiring a larger downpayment does little to reduce risk of default compared to strong underwriting requirements, and only puts home ownership out of reach for many families who have the income necessary to carry the cost of the home purchase.”