Senate Banking Committee Questions HUD Secretary Donovan on FHA Financial Stability
AT TODAY’S HEARING, members of the Senate Committee on Banking heard testimony from Shaun Donovan, Secretary of the U.S. Department of Housing and Urban Development (HUD), regarding oversight of the Federal Housing Administration (FHA).
In his opening statement, Chairman Tim Johnson (D-S.D.) expressed concern that the FHA might need taxpayer support for the first time in its history. Johnson said he was interested in hearing what the administration will propose to return the FHA to financial stability, and said he would work with the Committee to find a way to do that if the proposals are not sufficient.
Ranking Member Richard Shelby (R-Ala.) said in the time since the FHA emergency insurance fund dropped below its 2 percent capital ratio as mandated by Congress in 2008, the agency’s future growth projections have underperformed and he urged Donovan to come up with a credible way to restore financial stability. Shelby also criticized the FHA for understating their problems over the past five years.
Sen. David Vitter (R-La.) agreed with the criticisms made by Shelby, while Sen. Robert Menendez (D-N.J.) said he believed that without the FHA the housing market would be in a far greater crisis than currently.
In his testimony, Donovan outlined steps the agency has already taken to return to fiscal health, including premium increases in the upcoming year and higher down payment requirements for riskier borrowers. He called for swift action from Congress to reduce the likelihood that a draw from the Treasury will be necessary.
During the question and answer portion of the hearing, Johnson asked what actions the agency has taken already to restore the fiscal health of the FHA. Donovan noted that premiums have been raised four times and they are taking steps to raise premiums again. He also highlighted that down payments for riskier borrowers have been raised, both of which increased the value of the fund and improved the position of the agency.
Johnson and Shelby asked what the likelihood of a bailout from the Treasury would be. Donovan could not guarantee the FHA would not need financial assistance at the end of the fiscal year in September 2013, but said the agency has significantly decreased the chance of needing a bailout with recent reforms. Donovan noted concern about going too far with reforms and potentially hurting the housing recovery. Donovan said the single most important thing to restore the fund to health is whether the housing market continues to recover.
Shelby asked how a potential bailout would be repaid. Donovan expressed the importance of keeping new business profitable in order to pay back taxpayers should a bailout be necessary.
Sen. Bob Corker (R-Tenn.) asked if the agency would consider raising the minimum credit score required to buy or refinance a home to 620, which is the current minimum FICO score required in the private sector. The FHA minimum is currently 580. Donovan said that is something the agency is looking into.
Corker also asked if the agency would issue a moratorium on reverse mortgages. Donovan recognized the need to make a change in that area and noted the FHA Saver Program as a “safer, better alternative,” but expressed hesitation to eliminate the option altogether while it still works for some seniors. Sen. Kay Hagan (D-N.C.) also mentioned the severe losses in the reverse mortgage market and asked how it could be remedied.
Corker asked if the FHA could align their loan limits with those of Fannie Mae and Freddie Mac, which are lower. Donovan said the FHA supports the lowering of the loan limits, but that Congress explicitly extended the higher limits last year. He agreed that going back to the lower limits would be beneficial.
Corker and Vitter both expressed concern that the FHA has lax standards in comparison with Fannie and Freddie, particularly concerning the three-year requirement before foreclosed borrowers can borrow again. Donovan agreed that the standards for determining worthy borrowers need to be clarified, but also noted that many homeowners had excellent credit prior to foreclosure and only faced foreclosure after the economic downturn and unemployment.
Vitter said he is concerned the changes and reforms the FHA is proposing are not significant enough to prevent a bailout. Donovan said he would need the help of Congress and one major change that could help would be the authority to reduce loan limits. He urged Congress to act as quickly as possible.
Menendez used the hearing as an opportunity to ask for a commitment from the FHA to help New Jersey and New York recover from Hurricane Sandy. Donovan said a supplemental would be proposed this week to help the residents affected by the storm.
Chairman Johnson closed the hearing and reminded the Committee that the financial stability of the FHA is not an issue to be taken lightly.
More information and an archived webcast of the hearing can be found here.
AT TODAY’S HEARING, members of the Senate Committee on Banking heard testimony from Shaun Donovan, Secretary of the U.S. Department of Housing and Urban Development (HUD), regarding oversight of the Federal Housing Administration (FHA).
In his opening statement, Chairman Tim Johnson (D-S.D.) expressed concern that the FHA might need taxpayer support for the first time in its history. Johnson said he was interested in hearing what the administration will propose to return the FHA to financial stability, and said he would work with the Committee to find a way to do that if the proposals are not sufficient.
Ranking Member Richard Shelby (R-Ala.) said in the time since the FHA emergency insurance fund dropped below its 2 percent capital ratio as mandated by Congress in 2008, the agency’s future growth projections have underperformed and he urged Donovan to come up with a credible way to restore financial stability. Shelby also criticized the FHA for understating their problems over the past five years.
Sen. David Vitter (R-La.) agreed with the criticisms made by Shelby, while Sen. Robert Menendez (D-N.J.) said he believed that without the FHA the housing market would be in a far greater crisis than currently.
In his testimony, Donovan outlined steps the agency has already taken to return to fiscal health, including premium increases in the upcoming year and higher down payment requirements for riskier borrowers. He called for swift action from Congress to reduce the likelihood that a draw from the Treasury will be necessary.
During the question and answer portion of the hearing, Johnson asked what actions the agency has taken already to restore the fiscal health of the FHA. Donovan noted that premiums have been raised four times and they are taking steps to raise premiums again. He also highlighted that down payments for riskier borrowers have been raised, both of which increased the value of the fund and improved the position of the agency.
Johnson and Shelby asked what the likelihood of a bailout from the Treasury would be. Donovan could not guarantee the FHA would not need financial assistance at the end of the fiscal year in September 2013, but said the agency has significantly decreased the chance of needing a bailout with recent reforms. Donovan noted concern about going too far with reforms and potentially hurting the housing recovery. Donovan said the single most important thing to restore the fund to health is whether the housing market continues to recover.
Shelby asked how a potential bailout would be repaid. Donovan expressed the importance of keeping new business profitable in order to pay back taxpayers should a bailout be necessary.
Sen. Bob Corker (R-Tenn.) asked if the agency would consider raising the minimum credit score required to buy or refinance a home to 620, which is the current minimum FICO score required in the private sector. The FHA minimum is currently 580. Donovan said that is something the agency is looking into.
Corker also asked if the agency would issue a moratorium on reverse mortgages. Donovan recognized the need to make a change in that area and noted the FHA Saver Program as a “safer, better alternative,” but expressed hesitation to eliminate the option altogether while it still works for some seniors. Sen. Kay Hagan (D-N.C.) also mentioned the severe losses in the reverse mortgage market and asked how it could be remedied.
Corker asked if the FHA could align their loan limits with those of Fannie Mae and Freddie Mac, which are lower. Donovan said the FHA supports the lowering of the loan limits, but that Congress explicitly extended the higher limits last year. He agreed that going back to the lower limits would be beneficial.
Corker and Vitter both expressed concern that the FHA has lax standards in comparison with Fannie and Freddie, particularly concerning the three-year requirement before foreclosed borrowers can borrow again. Donovan agreed that the standards for determining worthy borrowers need to be clarified, but also noted that many homeowners had excellent credit prior to foreclosure and only faced foreclosure after the economic downturn and unemployment.
Vitter said he is concerned the changes and reforms the FHA is proposing are not significant enough to prevent a bailout. Donovan said he would need the help of Congress and one major change that could help would be the authority to reduce loan limits. He urged Congress to act as quickly as possible.
Menendez used the hearing as an opportunity to ask for a commitment from the FHA to help New Jersey and New York recover from Hurricane Sandy. Donovan said a supplemental would be proposed this week to help the residents affected by the storm.
Chairman Johnson closed the hearing and reminded the Committee that the financial stability of the FHA is not an issue to be taken lightly.
More information and an archived webcast of the hearing can be found here.