Tags: Donovan | FHA | fund | shortfall

HUD’s Donovan Quizzed on the Condition of the FHA

By    |   Friday, 07 Dec 2012 12:41 PM

The Senate Banking Committee held a hearing Thursday on the implications of a report from the independent actuary for the Federal Housing Administration (FHA), the insurer of $1 trillion worth of mortgages, that showed the value of the FHA’s Mutual Mortgage Insurance Fund has slipped into negative territory and a federal bailout may be required as early as the end of fiscal year 2013.

The sole witness was Housing and Urban Development Secretary Shaun Donovan, whose department has jurisdiction over the FHA. Ranking Republican Sen. Richard Shelby, R-Ala., noted that the report had come out days after the re-election of President Barack Obama, while Committee Chairman Sen. Tim Johnson, D-S.D., recognized that Shelby would be replaced next year as the ranking senator by Sen. Michael Crapo, R-Idaho.

The senior committee members expressed concern tempered with expressions of a willingness to work on a bipartisan basis to enact whatever legislative changes might be needed to help Donovan make policy changes to reduce the likelihood that a bailout might be needed.

Democrats were mild in their criticism and used their time to celebrate the role of the FHA in supporting the housing industry. Johnson cited a statement by Mark Zandi, chief economist at Moody’s Analytics, a favorite economist of both parties, that without the FHA’s intervention, housing prices would have declined a further 25 percent and the recession would have been deeper than it was.

Donovan’s statement put a positive spin on the FHA’s predicament by claiming credit for the recent rise in house prices, touting modest reforms in the FHA’s underwriting standards, insisting that the financial problems of the FHA were due to admittedly poor risk management in the 2007-09 period and asserting that the current book of business is profitable.

In response to repeated efforts to get him to predict whether a bailout would be needed, Donovan stated that the agency is not “perfect,” that he does not have a crystal ball and that the determination as to the need for a bailout would be made based on the administration’s budget submission rather than the figures of the independent actuary.

Shelby highlighted findings by the actuary that the economic value of the FHA funds has dropped to -$16 billion and its reserve ratio to -1.44 percent. He blamed the FHA for having made loans to borrowers with poor credit that contributed to the housing bust and for failing over a period of five years to take action to prevent the deterioration in the FHA’s finances.

He summarized the circumstance as follows: “This is now the fourth year in a row that the FHA fund has been below its statutory minimum capital levels. Yet each year we’re told that this is a ‘temporary’ dip and that within a few years, it would ‘return above the 2 percent level within two or three years,’ and everything will be fine.”

However, Shelby’s ultimate message was more conciliatory. He concluded that it was “time for the FHA to get serious about reform,” while joining Donovan in facing “a great challenge” and hoping for success.

It fell to more junior Republicans to level more pointed criticisms at the FHA and Donovan. Sen. David Vitter, R-La., accused the FHA of not doing enough in terms of reforms to stem the losses, Sen. Bob Corker, R-Tenn., asked why the FHA has not adopted several obvious measures to improve the performance of the fund and Sen. Pat Toomey, R-Penn., questioned assumptions on which FHA’s forecast are based regarding the damaging effect of low interest rates and the prospect of a renewed recession during the period for which Donovan predicts recovery in the standing of the fund.

Specific items Corker listed, which he said he had discussed privately with Donovan, were the FHA’s use of a 580 credit score as its underwriting standard, whereas the market is at 620; making new loans to borrowers who had defaulted within the past three years, whereas the standard for government-sponsored enterprises (GSEs) is seven years; maintaining a loan limit of $729,000, whereas the GSE limit is $625,000; and “losing your shirt” on a poorly designed reverse mortgage program.

Even Sen. Kay Hagen, D-N.C., singled out the reverse mortgage program for losing $2.8 billion of the total $16 billion shortfall.

Vitter blasted the FHA as “a magnet for bad loans” and faulted the agency for allowing the industry to establish “a huge profit center” at the expense of the FHA.

The outlook is for the Senate to develop “balanced” legislation to serve as a counterpart to a bill the House has passed and give the FHA the authority that Donovan claims it lacks to adopt further reforms. There is room on the right for someone like Vitter to call for the imposition of a reform program independent of the agency’s halting volition.

On Dec. 13, Cato will host a program that will look at other perspectives than those of the FHA, providing another opportunity to gauge the likelihood that the FHA can avoid becoming the latest example of a GSE bailout due to excessive government accommodation in support of the troubled housing and real estate complex.

Robert Feinberg served on the staff of the House Banking Committee for the 10 years that encompassed the savings-and-loan debacle and the beginning of its migration to the banking sector. Subsequently, he has consulted on issues related to the crisis for law firms, accounting firms, securities firms and trade associations.

Feinberg holds a BS.E. from the Wharton School and a J.D. from the Law School of the University of Pennsylvania. He has drafted dissenting views on landmark banking legislation, contributed to a financial blog and written hundreds of reports for clients to document the course of the financial crisis as it has unfolded over the past three decades.

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Robert-Feinberg
The Senate Banking Committee held a hearing Thursday on the implications of a report from the independent actuary for the Federal Housing Administration (FHA) that showed the value of the FHA’s Mutual Mortgage Insurance Fund has slipped into negative territory and a federal bailout may be required.
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Friday, 07 Dec 2012 12:41 PM
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