CONGRESSWOMAN ELISE STEFANIK
On Monday, September 10, 2012, the House is scheduled to consider H.R. 4264, FHA Emergency Fiscal Solvency Act of 2012, under a suspension of the rules, requiring a two-thirds majority vote for passage. The bill was introduced by Rep. Judy Biggert (R-IL) on March 27, 2012, and referred to the Committee on Financial Services. The Committee held a mark-up session on March 27, 2012, and ordered the bill to be reported by a voice vote.
H.R. 4264 would establish minimum annual premiums for mortgage insurance and would require lenders that committed fraud to reimburse the Federal Housing Administration (FHA) for mortgage-insurance losses.
Under Section 2 of the bill, the Department of Housing and Urban Development (HUD) would be required to establish a minimum annual mortgage insurance premium of not less than 0.55 percent of the remaining insured principal balance. This section would also give HUD the discretion to charge an annual premium of up to 2.0/2.05 percent. This provision will take effect six months after the date of the bill's enactment.
Section 3 would permit HUD to require indemnification from a mortgagee if HUD determines that the mortgagee knew, or should have known, of a serious or material violation of HUD's mortgage underwriting standards for FHA loans. If fraud or misrepresentation was involved in the origination or underwriting of the FHA mortgage, HUD could require the mortgagee to indemnify HUD regardless of when an insurance claim is paid. This section would also require HUD to establish a process for lenders to appeal HUD's indemnification determinations, and to issue regulations to implement this section, to report on the number of fraudulent or improperly underwritten loans, and to report on the effect on FHA's insurance fund when indemnification is required.
Section 4 would require HUD to analyze and report on “early period delinquencies” (defined as a mortgage that becomes 90 or more days delinquent within the first 24 months of the loan) for FHA loans and to seek indemnification from lenders for early period delinquencies.
Section 5 would require HUD to provide an independent actuarial report on the FHA semiannually, rather than annually, if the FHA fails to maintain its 2.0 percent capital ratio requirement. This section would also require that HUD analyze the cost and feasibility of providing an independent actuarial study on a quarterly basis.
To implement Section 3 of the legislation, Section 6 would strike subsection (c) of Section 256 of the National Housing Act, which authorized HUD to indemnify mortgagees for losses resulting from FHA mortgages that were not originated in accordance with HUD's requirements, or when fraud or misrepresentation were involved in the mortgage's origination.
Section 7 would authorize HUD to review mortgagee performance in a specific geographic area or across the nation, and to terminate the approval of the mortgagee to originate or underwrite FHA mortgages in a specific area or nationwide if HUD finds that a mortgagee has an excessive rate of early defaults or claims.
Section 8 would state that an FHA mortgage must be originated by a mortgagee approved by HUD or by a person authorized by the HUD Secretary to originate FHA mortgages, and that the mortgage is to be held by a mortgagee approved by HUD that can service the mortgage properly. FHA reverse mortgages must also be originated by a mortgagee, person or entity approved by the HUD Secretary.
Section 9 would instruct the HUD Secretary to require lenders, as a condition of FHA approval, to report to the FHA any action to terminate other lenders based a determination of fraud or material misrepresentation in connection with the origination of FHA mortgages within 15 days of such action.
Section 10 would amend the FHA reporting requirements for early payment delinquencies to require the HUD Secretary to track mortgage performance by loan servicer.
Section 11 would create a position within the FHA for a Deputy Assistant Secretary for Risk Management and Regulatory Affairs. The position would be filled by the HUD Secretary and reports to the FHA Commissioner on the management and mitigation of risk to FHA mortgage insurance funds.
Section 12 would establish a position of Chief Risk Officer for the Government National Mortgage Association (GNMA). The position would be filled by the HUD Secretary with a career appointee who must have practical experience in risk evaluation practices in large governmental entities. The Chief Risk Officer need not obtain GNMA or HUD approval before submitting reports, recommendations, and testimony to Congress.
Section 13 would instruct the HUD Secretary to report on mortgage servicer compliance with the FHA's guidelines on loan servicing, loss mitigation, and insurance claim submission. The report must include an estimate of annual costs to FHA, since 2008, resulting from failures by mortgage servicers to comply with the FHA's guidelines. The HUD Secretary would submit the report to Congress, including any legislative or administrative recommendations, within 120 days of the bill's enactment.
Section 14 would direct the HUD Secretary to submit to Congress, thirty days after the bill's enactment, an emergency capital plan for the restoration of the FHA's fiscal solvency. The plan would provide a detailed explanation of how the FHA's capital assets are monitored and tracked; how to ensure the FHA's financial safety without borrowing funds from the U.S. Department of Treasury; and describe how, if necessary, the FHA would draw down funds from the Treasury. If the FHA remains below the 2.0 percent capital reserve ratio, the FHA is to submit monthly reports to Congress that assess the financial status of the FHA, outline the FHA's capital reserve ratio, and describe actions the FHA undertakes to establish a capital reserve ratio above 2.0 percent. The requirement for the FHA to submit monthly reports would terminate once the FHA achieved a capital reserve ratio of 2.0 percent.
Section 15 would direct the Government Accountability Office to provide for an independent third party to conduct a safety and soundness review of the FHA's mortgage insurance programs and report on its findings. This one-time independent review would be conducted in accordance with generally accepted accounting principles applicable to the private sector. The third party's report would describe the methodology and standards used to conduct the independent review and include recommendations for restoring the FHA's reserve funds and capital.
Section 16 would direct HUD, within 90 days of the bill's enactment, to review and revise the standards and requirements for its annual actuarial report and quarterly reports to ensure that these reports provide meaningful financial information, do not contain misrepresentations, and make available all relevant information, and to prohibit material omissions in these reports that would make them misleading.
Section 17 would direct HUD to study the FHA's mortgage insurance programs to assess the need for these programs, to identify insurance programs that are unused or underused, and to identify methods for streamlining, consolidating, simplifying, increasing the efficiency of, and reducing the number of these programs. HUD would be required to submit this study to Congress within 12 months of the bill's enactment.
This bill is intended to provide the Federal Housing Administration (FHA) with the tools it needs to protect the Mutual Mortgage Insurance Fund (MMIF) from becoming insolvent.
According to H. Rept. 112-544, “The FHA was established as an agency of the Department of Housing and Urban Development (HUD) by the National Housing Act of 1934 to provide federal mortgage insurance in order to broaden homeownership, protect lending institutions, and stimulate the building industry. Before the FHA was established, home mortgages did not exceed 50 percent of home values and were short term, lasting no longer than five years. At the end of the fifth year, homeowners had to pay their mortgages in full or roll them over into another loan. During the Great Depression, lenders were unable or unwilling to roll over loans that came due. As a result, many borrowers lost their homes to foreclosure and lenders lost money because property values declined significantly. The creation of the FHA provided stability and liquidity to the mortgage market and fostered the introduction of the 30-year mortgage and mortgage standardization.
“During the housing boom of the mid-2000s through 2006, the FHA's share of the mortgage market fell to under two percent of mortgage originations (measured by dollar volume). But as housing prices began to fall, lenders tightened their underwriting criteria and the FHA began to play a larger role in the mortgage market. The Congressional Research Service reported that during FY 2010, the FHA guaranteed nearly 40 percent of the home-purchase mortgages that were originated or refinanced, which corresponds to approximately 1.1 million homebuyers. FY 2010 was the second time that the FHA has assisted more than 1 million homebuyers in a single year. As a result of these trends, the FHA is now the largest government insurer of mortgages in the world, with a mortgage portfolio of 7.4 million loans and a combined unpaid principal balance of over $1 trillion.
“The FHA is intended to be self-funded: the premiums paid by homeowners for FHA mortgage insurance are supposed to defray the costs of running the program and to cover losses when loans default. But while the FHA's market share has been growing, the FHA--like most other participants in the mortgage market--has been faced with higher default rates. The FHA thus finds itself supporting the mortgage market by insuring new home loans as it seeks to reinforce the stability of its single-family MMIF. By statute, the FHA is required to maintain the MMIF's capital reserve ratio at 2 percent or greater. The capital reserve ratio was first required in the Omnibus Budget Reconciliation Act of 1990, when there was significant concern that the FHA would deplete its capital and require federal appropriations to continue. In the years since the capital reserve ratio was adopted, the FHA's ability to meet the capital reserve requirement has served as a measure of the health of the MMIF.
“On November 15, 2011, HUD released the FHA's FY 2011 Actuarial Report, prepared for HUD by an independent auditor. The Actuarial Report showed deterioration of the MMIF's capital reserve ratio, which fell to 0.24 percent in FY 2011. The FY 2011 Actuarial Report also noted that as of the end of FY 2011, the MMIF's economic value--which is the MMIF's existing capital resources plus the net present value of FHA's current book of business--was $1.19 billion, a decrease of 77 percent from the MMIF's $5.16 billion economic value as of the end of FY 2010. The fall in the MMIF's economic value was caused by declines in national home prices of more than five percent, more loans having elevated default potential, and uncertain economic conditions. The FY 2011 Actuarial Report concluded that under more pessimistic economic scenarios than the Actuarial Report's base-case assumptions, the MMIF's economic value may be negative beginning in FY 2012 through FY 2018.
“Today, the FHA faces its most serious fiscal challenge. In its FY 2011 annual report to Congress, the FHA acknowledged that ‘[c]laim expenses were greater than the sum of premium revenue and property recoveries for the year.' In other words, the FHA now spends more than it collects. In February 2012, the President's FY 2013 budget proposal confirmed the FHA's finances were in a precarious condition, projecting that the FHA could be required to draw $688 million in emergency funds from Treasury to build up the insurance fund.
“As a result of the MMIF's falling capital reserves, the FHA is vulnerable to further defaults. If the MMIF were exhausted and the FHA lacked funds to pay insurance claims, the Treasury would be forced to cover lenders' claims directly. Because the FHA's guarantees are backed by the federal government, a large number of defaults could result in significant losses to the FHA that would ultimately be borne by taxpayers. The deteriorating financial position of the FHA's capital reserve funds raises concerns that in the same way that Fannie Mae and Freddie Mac were bailed out by taxpayers, the FHA could also expose taxpayers to further risk.
“Apart from the FHA's parlous financial condition, there is also great concern that the FHA, as of the end of 2011, controlled well over half of the mortgage insurance market. Given the consensus among policymakers that government should facilitate the return of private capital to the housing finance market, the government's continued dominance of the mortgage insurance market remains troubling. H.R. 4264 would not only protect taxpayers from the government's exposure to losses resulting from its presence in the mortgage insurance market, it would also, through its premium structure, level the playing field so that the private sector could provide mortgage insurance on competitive terms. In addition, H.R. 4264 gives the FHA the tools it needs to implement reforms that bolster the FHA's reserves and reduce taxpayer risk.”
According to the Congressional Budget Office (CBO) cost estimate, implementing H.R. 4264 would cost $11 million over the 2013-2017 period, subject to the availability of appropriated funds. This legislation would not affect direct spending or revenues; therefore, pay-as-you-go procedures do not apply.