By Yali N'Diaye
-Market Share Of 10% to 15% Appropriate -Warns Against Excessive Premium Increases
WASHINGTON (MNI) - As U.S. lawmakers try to assess whether the Federal Housing Administration, the government-run mortgage insurer, is on the verge of a taxpayer bailout or going bust, Assistant Secretary for Housing Carol Galante Wednesday suggested the first option was not inevitable and ruled out the second.
While highlighting "aggressive" actions taken to restore the insurance fund's financial health and avoid a bailout, Galante warned against excessive increases in mortgage insurance premiums, which she deemed "appropriately" priced in light of the risk taken on the new healthier vintage loans.
She added that raising premiums too much could impede borrowers' access to credit, going against the FHA's mission.
On the other hand, there is a problem, Galante said, in the reverse mortgage program that poses "serious challenges." In fact, "we are asking for some emergency authority there," she told lawmakers.
The hearing was called following the annual independent actuary's review of the FHA's Mutual Mortgage Insurance Fund for fiscal year 2012 released last November, which estimated the economic value of the Fund at a negative $13.48 billion. This represented a $14.67 billion drop from the $1.19 billion estimated economic value as of the end of FY 2011.
For the Committee's chairman, Jeb Hensarling, the conclusion was unequivocal: "The FHA is broke. The FHA is flat broke. And I fear soon the FHA will prove to be bailout broke."
"Clearly the FHA is in a dire financial predicament," with claims exceeding cash on hand, he stressed.
Galante, however, said that the actuary's report "does not in and of itself mean that it will be necessary for FHA to use its authority to draw from Treasury to reserve for projected losses over the next 30 years," which she refused to call a bailout since it would be money put in reserve just in case.
Drawing from Treasury "is a possibility," but it depends on factors such as the President's budget estimates as well as "actions and activity of the FHA throughout the remainder of the fiscal year," she said, which "are designed to reduce the likelihood that FHA will need to draw on Treasury assistance at the end of FY 2013."
On the claims front, Galante said the FHA has $31 billion in current reserves against projected losses, not to mention additional revenue coming in every year from the "very profitable" business since 2010, unlike the loss-making legacy loans of 2007-2009.
Therefore, "on an ongoing basis, on a cash flow basis, there is certainly money there to pay the claims," she said.
The actuary projects nearly $60 billion in claims costs for FHA from seriously delinquent loans that will go to claim by the end of FY 2014, largely arising from loans insured between 2007 and 2009.
While she described the steps taken as "aggressive," some lawmakers wondered if the agency had been aggressive enough, suggesting, for instance, it could have raised its mortgage insurance premium more.
"Should we be more aggressive in trying to restore this Fund" to health, one lawmaker asked.
After having raised the premium five times, Galante responded, "we think that that is the right place for the pricing of the risk we are taking on for the new loans."
"We have to be careful about, you know, pricing new borrowers to pay for the challenges of the past," she said, warning that could impede their access to credit.
Asked whether the FHA was charging the maximum premium allowed by law, she said that was the case only for the loans reaching the high limit, a limit she would like to be reduced.
While the FHA does not charge the maximum premium for other loans, Galante believes that "we are priced now appropriately for the risk that we are taking on."
In other comments, Galante said the FHA's role in the housing market finance should be looked at as part of an overall reform that includes government-sponsored enterprises.
She agreed with lawmakers that the FHA should reduce its footprint in the market, citing a 10% to 15% market share as "appropriate."
Galante added that the private sector is unlikely to completely fill the gap, even if she would like to see lenders extend credit to a broader range of borrowers.
She added that should interest rates remain low, it would encourage borrowers to refinance out of FHA, which would also contribute to increase the private sector market share along with a housing recovery.
Report: Federal Housing Administration (FHA) To Exhaust Capital Reserves (May Need A Bailout)
