“This is Not Your Parents’ FHA”
Statement as Prepared for Delivery at the Financial Services Full Committee Hearing
FHA: Examining its Proper Role in our Mortgage Insurance Market
WASHINGTON, D.C. – February 6, 2013 – (RealEstateRama) — Thank you, Mr. Chairman, for holding this important hearing examining the Federal Housing Administration’s (FHA) role in the mortgage insurance market. As you mentioned, this is the first in a series of hearings. I look forward to holding similar hearings in my Subcommittee. I also look forward to working with Ranking Member Waters and Ranking Member Capuano as we seek to reform FHA and nurse it back to financial health.
As we meet today, FHA’s financial condition continues to deteriorate. FHA’s most recent actuarial report showed that it’s Mutual Mortgage Insurance (MMI) Fund capital reserve ratio fell to negative 1.44 percent—well below the Congressional mandated ratio of 2 percent. This means that FHA does not have sufficient reserves to cover its expected losses. The report also noted that the MMI Fund’s economic value was negative $16.3 billion, paving the way for another taxpayer funded bailout. This is on top of the roughly $190 billion taxpayer bailout of the GSEs.
There’s a pretty clear trend here: the government doesn’t do a good job at pricing risk.
As if the impending bailout were not enough, I am becoming increasingly concerned as FHA strays far away from its intended mission. FHA was created in the 1930’s with a unique mission to serve targeted populations such as first-time homebuyers, communities with little access to credit, and other higher-risk borrowers who were still creditworthy. I’m a homebuilder by trade, and I’ve been in this business for a long time. And I can tell you, FHA’s mission has changed a great deal over that time. This isn’t your parents’ FHA. There are now loan limits loan limits now of upwards of $700,000. In fact, over 90 percent of FHA loans insured today would not have even qualified for insurance under the original program.
Since the onset of the financial crisis, the Agency has morphed from a mortgage insurer of last resort to a dominant component of our mortgage finance system. It has done this by expanding its insurance to higher income borrowers and houses in the upper end of the marketplace. For example, in my hometown of Lubbock, TX the area median home price is roughly $132,000; however FHA can insure loans up to $271,050 – more than double the median home price. That doesn’t make sense.
As a result, FHA’s insurance portfolio has exploded to $1.12 trillion – making it equivalent in size to the entire property & casualty and life & health insurance industries combined. Not surprisingly, FHA’s unwieldy growth has crowded out private mortgage insurers, thereby thwarting the ability of private capital to enter the mortgage market. According to the Government Accountability Office (GAO), FHA’s share of the mortgage insurance market stands at 56 percent compared to just 19 percent for the private insurers. And given FHA’s dire financial condition, it is unlikely that its market share or its insurance portfolio will be reduced as the Agency attempts to grow its way out of its problems.
Finally, it is worth noting that FHA’s insatiable desire to “grow out of the problem” has led to an aggressive push that could have devastating consequences for the very people FHA is intended to help. FHA’s expanded role has been fueled by similar tactics employed by subprime lenders at the height of the housing boom. While appropriate for some, these practices – including seller concessions, small down payments, low credit scores, and cheap upfront pricing – can entice others who are unprepared for the obligations of homeownership to overextend themselves. The likelihood of enticing such borrowers is heightened as FHA becomes more aggressive in its push to ramp up its market share.
You know, there’s a reason that the American dream includes owning a home. Home ownership provides a secure environment to raise a family, it creates a sense of community, and it gives us a feeling of pride. FHA was intended to help low-income families achieve that dream. Instead, I worry their policies are creating a destabilizing effect, and taxpayers are on the hook for their bad risk management practices.
I thank the Chairman for calling this hearing and I look forward to hearing from our witnesses today as we address these important issues.