Corker, Vitter Call on Obama Administration to Reconsider Recent FHA Insurance Premium Decision

Press release from U.S. Sen. Bob Corker, R-Tenn.; January 8, 2015:

Senators “deeply concerned about placing the taxpayer in jeopardy by underpricing these government-guaranteed loans.”

WASHINGTON – U.S. Senators Bob Corker (R-Tenn.) and David Vitter (R-La.), members of the Senate Banking, Housing and Urban Affairs Committee, today sent a letter to U.S. Department of Housing and Urban Development Secretary Julian Castro asking the administration to reconsider its recent decision to reduce annual insurance premiums for mortgages insured by the Federal Housing Administration (FHA).

The administration’s decision comes while FHA holds just .41 percent in its capital reserve, well below the 2 percent statutory minimum, and in the wake of a yet to be repaid $1.7 billion taxpayer bailout of FHA in 2013. In December, Fannie Mae and Freddie Mac reduced down payment requirements to as little as 3 percent for some borrowers.

In the letter, the senators wrote, “Both Senate and House mortgage finance reform proposals demonstrate bipartisan belief that capital levels are inadequate now. Years into the recovery, we need to be aware: if the economy catches a cold, FHA catches pneumonia.”

The senators added, “The lowering of the insurance premium on FHA loans will make FHA loans more competitive relative to the Fannie and Freddie guaranteed loans. Instead of better protecting taxpayers from incurring losses through these government initiatives during a future economic downturn, the government is involved in a race to the bottom by reducing taxpayer protections to expand government credit guarantees. We are deeply concerned about placing the taxpayer in jeopardy by underpricing these government-guaranteed loans. Therefore, we respectfully request that you reconsider this proposed action.”

Full text of the letter is included below:

January 8, 2015

Honorable Julian Castro
Secretary
U.S. Department of Housing and Urban Development
451 7th Street S.W.
Washington, DC 20410

Dear Secretary Castro:

We are writing out of concern for a misguided plan to reduce fees and premiums charged by the Federal Housing Administration (FHA).  We believe such a change in policy is, at best, premature. The Mutual Mortgage Insurance (MMI) Fund should be adequately capitalized before you reduce FHA premiums and fees to help prevent future FHA bailouts.

As you know, FHA is not in compliance with its minimum statutory capital requirement – the ratio of the MMI Fund’s economic value to its unamortized insurance-in-force, which the National Affordable Housing Act of 1990 (NAHA) set at 2 percent. Six years after the financial crisis, the capital reserve ratio is 0.41, still well below FHA’s mandate. Additionally, the fiscal year 2014 independent actuarial analysis of FHA’s economic net worth and soundness – an annual requirement established in NAHA – states that the MMI Fund isn’t expected to achieve its statutory mandate until fiscal year 2016. This is a year later than the actuary anticipated in 2013 and does not take into account this recent policy announcement.

It is also worth noting that we are only a year removed from FHA’s first bailout. In September 2013, losses at FHA mounted so high that federal statute required a $1.7 billion credit transfer from the U.S. Treasury to FHA to cover expected losses. This is particularly important because that $1.7 billion dollars is baked into the FHA’s balance sheet in the 2014 actuarial report. Indeed, FHA staff acknowledged to congressional staff in November 2014 that there is no plan in place to repay the bailout by making a credit transfer back to the Treasury.  When assessing the health of FHA’s balance sheet, we must remember that it is currently being bolstered by a bailout with no plans of repayment.

Both Senate and House mortgage finance reform proposals demonstrate bipartisan belief that capital levels are inadequate now.  Years into the recovery, we need to be aware:  if the economy catches a cold, FHA catches pneumonia. Indeed, in the year before the financial crisis began, 2006, FHA had loan loss reserves of 7.38 percent. Why reduce premiums and fees today if FHA is years away from 2 percent?

FHA’s intention with this policy is obviously to increase the number of loans it guarantees.  At the same time, the Federal Housing Finance Agency, which is the conservator for Fannie Mae and Freddie Mac, recently reduced its minimum downpayment requirement for those GSEs to 3 percent to compete with FHA loans that have a 3.5 percent minimum downpayment.  The lowering of the insurance premium on FHA loans will make FHA loans more competitive relative to the Fannie and Freddie guaranteed loans.  Instead of better protecting taxpayers from incurring losses through these government initiatives during a future economic downturn, the government is involved in a race to the bottom by reducing taxpayer protections to expand government credit guarantees.

We are deeply concerned about placing the taxpayer in jeopardy by underpricing these government-guaranteed loans. Therefore, we respectfully request that you reconsider this proposed action.

Thank you for your public service.

Sincerely,

Bob Corker
U.S. Senator

David Vitter
U.S. Senator