WASHINGTON, D.C. – April 11, 2013 – (RealEstateRama) — David H. Stevens, President & CEO of the Mortgage Bankers Association (MBA), testified today before the U.S. House of Representatives Financial Services Subcommittee on Housing and Insurance at a hearing entitled “Sustainable Housing Finance: Perspectives on Reforming the FHA” Below is a copy of Mr. Stevens’ oral testimony, as prepared for delivery.
“Chairman Neugebauer, Ranking Member Capuano, and members of the subcommittee, thank you for the opportunity to offer MBA’s perspectives on FHA reform. MBA represents the entire real estate finance industry. Given the circumstances facing FHA in the single-family market, my oral statement focuses on that sector. My written testimony includes our views on FHA’s critical role in multifamily rental housing as well.
“FHA has never played such an important role in the housing market. Today, it is the dominant source of mortgage finance for borrowers with low down payments and those without high incomes or inherited wealth. Many of these are first-time homebuyers, young families looking to put down roots in a community, and a segment that must be served if we are going to grow our economy and sustain the housing recovery.
“Since the onset of the housing crisis, when FHA’s books suffered like everyone else’s, the agency has taken a number of steps to address losses in its single-family portfolio, by raising mortgage insurance premiums, increasing down payment requirements for certain borrowers, eliminating the approval of loan correspondents, raising lender net worth requirements, re-examining reverse mortgage policies, and establishing the Office of Risk Management.
“By making these changes, FHA has moved swiftly to protect taxpayers and the fund. The credit profile and performance of the 2010 to 2012 portfolios demonstrate the effects of these changes. For example, the average FHA credit score for 2011 was 696, up from a historical average closer to 650. More importantly, these books are projected to contribute significantly to the economic value of the MMI fund over the next several years.
“Looking ahead, MBA believes further programmatic changes at FHA must balance three priorities: restoring financial solvency; preserving FHA’s critical housing mission; and maintaining the agency’s countercyclical role. We continue to work with our members to develop additional policy changes regarding FHA’s future. We will certainly share those recommendations as a resource for this panel when completed.
“There are a number of steps this subcommittee could take to further strengthen FHA and promote the return of private capital. Loan limits could be lowered from the levels that were necessary at the height of the housing crisis. Downpayment requirements could be adjusted to mitigate for other risk factors, like low credit scores. Risk sharing is another area that, if done prudently, could potentially meet all of the objectives I just listed.
“Similarly, risk-based underwriting could further reduce FHA’s credit risk by targeting areas of risk layering. However, the consequences to FHA’s traditional borrowers on each of the above suggestions could be significant if FHA employs overly stringent credit controls. Finding the right balance will be critical.
“Many lenders in recent years have tightened their standards beyond FHA’s minimums. FHA may need to lock in some of these overlays as appropriate. This would protect FHA from any erosion in standards as market conditions evolve.
“Also, in recent years, FHA has increased its oversight and enforcement of agency-approved lenders. Let me be clear: as FHA Commissioner, I initiated tighter controls and enforcement procedures that shut down irresponsible FHA lenders. When warranted, this is certainly the right thing to do for the fund. The key is finding the proper tolerances and communicating them clearly to market participants. When lenders are forced to operate their businesses to near-perfect standards, they will operate well inside of the published standards.
“Right now, credit is far tighter than anyone has experienced in decades. There may be families with good credit willing to put down substantial down payments that are being frozen out of the market because the risks of making any mistake are too great – and the rules of the road are unclear – and often contradictory.
“When lenders don’t know whether FHA will demand indemnification or cancel the government guarantee, on top of the potential they may face substantial financial penalties because the goal posts have been moved, they will – quite naturally – only lend to people with perfect credit – and limit financing options for FHA’s targeted population.
“Mr. Chairman, we need to strive to clear up the uncertainty in our real estate finance system. We need a system where homeownership is a doorway to opportunity and borrowers can once again feel safe, confident and secure in their loans, but also a system that thrives in an environment that encourages a competitive, responsible marketplace so business can grow.
“That includes not just FHA, but also examining the future of the entire housing finance system. Ultimately, all stakeholders want the same thing – a fully functioning market that relies most heavily on private capital, with a limited, appropriate role for federal programs.
“A stable, sustainable FHA program must be a part of that system.”
The Mortgage Bankers Association (MBA) is the national association representing the real estate finance industry, an industry that employs more than 280,000 people in virtually every community in the country. Headquartered in Washington, D.C., the association works to ensure the continued strength of the nation’s residential and commercial real estate markets; to expand homeownership and extend access to affordable housing to all Americans. MBA promotes fair and ethical lending practices and fosters professional excellence among real estate finance employees through a wide range of educational programs and a variety of publications. Its membership of over 2,200 companies includes all elements of real estate finance: mortgage companies, mortgage brokers, commercial banks, thrifts, Wall Street conduits, life insurance companies and others in the mortgage lending field. For additional information, visit MBA’s Web site: www.mortgagebankers.org.