Congress grills FHA supporters over premium reduction

by 27 Feb 2015
By Meghan de St. Aubin

Rohit Gupta, president and CEO of Genworth Mortgage Insurance and chair of U.S. Mortgage Insurers (USMI), testified before the House Financial Services Committee Housing and Insurance Subcommittee stressing the need for balance between the roles of the Federal Housing Administration (FHA) and MI when it comes to taxpayers.

In his testimony, Gupta focused the FHA’s recent decision to lower annual mortgage insurance premiums, which has caused a stir of discussion surrounding the roles of government and private capital in supporting homeowners while at the same time protecting taxpayers.

U.S. President Barack Obama announced in January that the FHA will drop mortgage insurance premiums from 1.35% to 0.85%. Administration officials said the move would help 800,000 homeowners who refinance their mortgages to save money, and draw 250,000 new homeowners into the market over the next three years.

"FHA and private MIs can and should serve as complementary forces that enable the FHA to remain focused on its fundamental mission of serving underserved markets," said Gupta at the hearing called, The Future of Housing in America: Oversight of the Federal Housing Administration, Part II.  "But for this model to work properly, it is critically important that the FHA not stray too far afield from that mission."

Douglas Holtz-Eakin, president of American Action Forum and former director of the Congressional Budget Office (CBO), criticized what he considered to be the hasty action by the administration to reduce FHA mortgage insurance premiums. He said the move will increase risk at FHA and delay by a year or two the time when it will achieve compliance with the 2% minimum capital requirement for the Mutual Mortgage Insurance Fund (MMIF).

However, Julia Gordon of the Center for American Progress and other FHA defenders argued that the FHA’s role is to support the housing market when the private sector “heads for the sidelines.” She added that the FHA’s current book of business will enable it to meet the congressionally mandated 2% threshold.

An independent audit of the MMIF found that the FHA’s single-family programs gained almost $6 billion in 2014 and posted its first positive balance since 2011. Analysts estimated the fund to be around $4.8 billion for the 2014 fiscal year. That’s compared to the negative $1.1 billion reported last fiscal year.

 Its capital-reserve ratio, which the FHA is supposed to keep above 2%, grew to 0.41%. While it has improved, it still falls short of last year’s projection.

Potential homeowners currently have two options for mortgage insurance. Homeowners can receive insurance from the government-backed FHA program or from private mortgage insurance (MI). Gupta pointed out that these options, while sounding similar have different impacts on taxpayers. 

If a homeowner chooses to receive mortgage insurance from the FHA,  the agency will cover 100% of losses if a loan defaults, which may provide less of an incentive to ensure that loans are underwritten and serviced in a sustainable manner, according to USMI.  In comparison, MI covers first losses down to a stated percentage, establishing a strong incentive to prudent underwriting and good servicing.

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