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House Financial Services Subcommittee Hearing on the Federal Housing Administration

House Financial Services Subcommittee on Housing, Community Development and Insurance

“An Examination of the Federal Housing Administration and Its Impact on Homeownership in America”

Thursday, December 5, 2019

 

Key Topics & Takeaways

  • Housing Finance Reform Proposals: Montgomery explained that under the housing finance reform proposals released by HUD earlier this year, FHA would still be part of HUD, but would have a consistent level of funding for technology and more flexibility in terms of procurement and personnel.
  • Portfolio Risk: Asked if Congress should be concerned about risks in FHA’s portfolio, Montgomery said FHA conducts daily stress tests on its portfolio and he thinks FHA is managing the balance between access to credit and reserves well. He highlighted that there have been concerns about the number of loans with risk layering, a combination of a high debt-to-income ratio and low credit scores, though he explained that FHA made changes to the total scorecard that seem to be having their intended effect and stopped the three year slide in credit scores.

Witness

Opening Statements

Chairman Lacy Clay (D-Mo.)

In his opening statement, Clay highlighted that there was a time when the Federal Housing Administration’s (FHA) policies explicitly denied access to the American dream of homeownership to people of color, making owning a home a privilege for white Americans and contributing to the racial wealth gap. Clay said that FHA plays an important role in the housing finance system, helping ensure access to homeownership is widely available and helping many borrowers become homeowners for the first time. He noted that FHA is designed to play a countercyclical role in the housing market and helps provide long-term stability particularly during economic downturns. He said he remains concerned that FHA is failing to take adequate measures to help borrowers avoid foreclosure, including elderly borrowers with reverse mortgages.

Ranking Member Steve Stivers (R-Ohio)

In his opening statement, Stivers said that FHA has a critical mission of helping individuals achieve their dream of homeownership, noting that homes act as savings vehicles and are long-term investments that generally appreciate in value, helping families build equity and generate wealth. He cited a 2018 Duke University study that found that reducing disparities in homeownership by race would narrow the racial wealth gap by 31 percent. Stivers said that FHA and private mortgage insurance are important tools for helping people climb the economic ladder, citing FHA’s importance as a countercyclical buffer.

Testimony

The Honorable Brian D. Montgomery, Commissioner, Federal Housing Administration

In his testimony, Montgomery said that FHA has made much progress and improvements recently, specifically in improving the financial performance of its insurance fund, mitigating risk within its programs, reducing regulatory burdens and modernizing its technological infrastructure. He noted that in FY 2019, FHA insured forward mortgages for almost one million households, of which more than 600,000 were first-time homebuyers. Montgomery said the housing finance reform plan submitted to the president in September proposes a number of recommendations to further reduce risk, protect taxpayers and maintain focus on providing mortgage financing to low- and moderate-income families not served by traditional underwriting. He also noted that it is a top priority to modernize FHA’s information technology infrastructure and improve FHA’s operational ability to serve its customers.

Question & Answer

Housing Finance Reform Proposals

Stivers asked about the housing finance reform proposals released by the Department of Housing and Urban Development (HUD) earlier this year, including a proposal to restructure FHA as an autonomous government corporation within HUD. Montgomery explained that under this proposal FHA would still be part of HUD, but would have a consistent level of funding for technology and more flexibility in terms of procurement and personnel. Stivers listed a number of reform principles championed by House Financial Services Committee Chairwoman Maxine Waters (D-Calif.) including maintaining the 30-year fixed rate mortgage and the To-Be-Announced (TBA) market, ensuring private capital is in place to protect taxpayers, providing stability and liquidity to withstand a future financial crisis, and maintaining access for all qualified borrowers. Montgomery said he agreed with these principles.

Portfolio Risk

Rep. Blaine Luetkemeyer (R-Mo.) asked if Congress should be concerned about risks in FHA’s portfolio. Montgomery said FHA conducts daily stress tests on its portfolio and he thinks FHA is managing the balance between access to credit and reserves well. He highlighted that there have been concerns about the number of loans with risk layering, a combination of a high debt-to-income ratio and low credit scores, though he explained that FHA made changes to the total scorecard that seem to be having their intended effect and stopped the three year slide in credit scores.

Rep. Al Lawson (D-Fla.) asked if the FHA risk sharing program increases risk to the federal government. Montgomery replied that the multifamily risk share program is a “perfect model” of the federal government working together with developers and states. He further explained that while the program still exists, some parts are no longer permitted.

Down Payment Assistance

Reps. John Rose (R-Tenn.) and Clay asked about down payment assistance programs. Montgomery said down payment assistance has a long history at FHA, though some forms cost HUD more than $16 billion in losses which prompted the need to review the rules governing the program. He committed that any undertaking on this issue will be deliberate, based on research, and in the best interest of borrowers.

Disparities in Homeownership

Reps. Scott Tipton (R-Colo.), Stivers and Lawson asked about disparities in homeownership. Montgomery said FHA has convened a working group to look at minority homeownership. In response to a question from Tipton about rural communities, Montgomery explained that FHA is examining loan limits, manufactured housing, and developing multifamily properties.

Reverse Mortgages

Stivers asked about reverse mortgages and protecting seniors. Montgomery said the reverse mortgage program provides a great social mission to help seniors age in place, though it is not right for every senior. He said that although the program was affected by the housing collapse, recent home price appreciation and other changes ensure that the program is now headed in a better direction.

Alternative Credit Scoring

Rep. Al Green (D-Texas) asked about alternative credit scoring. Montgomery explained there are several models that look at utility payments, rent payments, and other factor in addition to traditional credit cards and auto loans to determine credit worthiness. He said FHA would be the appropriate place to conduct a pilot program on this issue and it should be done responsibly and in the best interest of borrowers.

For more information on this hearing, please click here.

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