The Secretary of the U.S. Department of Housing and Urban Development warned that without higher premiums for higher risk borrowers, the Federal Housing Administration could be driven into insolvency in the current mortgage market environment. He opposes less stringent requirements proposed for mortgage brokers to originate government-insured loans and wants to do away with down payment assistance programs funded by sellers.
HUD Secretary Alphonso Jackson wrote about his concerns in a letter to Rep. Barney Frank, chairman of the House committee on financial services, and Sen. Christopher Dodd, chairman of the Senate committee on banking, housing and urban affairs today. He called on both houses of Congress to reach agreement on H.R. 1852, the Expanding American Homeownership Act of 2007, and S. 2338, the FHA Modernization Act of 2007.
"Efforts to modernize the FHA are particularly pressing during this period of volatility in the real estate markets and contraction in the mortgage markets," Jackson wrote. "This becomes more critical as the housing market continues to decline."
The secretary said FHA does not support provisions of the existing bills that would limit the agency's ability to give lower premiums to borrowers with better credit histories, which would benefit a significant number of low income borrowers, or impose a 12-month moratorium on HUD's proposed modifications to the current premium structure.
"Especially in the current economic environment, when market-rate loans are increasingly difficult to obtain, FHA needs to manage its insurance funds in a manner that is safe and sound and that guarantees its financial solvency in the future," he said. "Unfortunately, the self-sustaining nature of the FHA insurance fund has been severely threatened in recent years by a shift in the overall composition of the FHA borrower pool."
Jackson explained the agency has been handling more higher risk borrowers -- especially those with little invested in the home because of seller funded down payment assistance programs. He said FHA heading toward financial insolvency in today's volatile market under the current premium structure.
He also called for an end to seller funded DPA's, which he said push default rates higher.
"HUD strongly urges Congress to prohibit seller-funded downpayment assistance in any final legislation on FHA reform," Jackson stated.
He estimated that continuing with DPAs in addition to prohibiting risk-based premiums would cost taxpayers $1.4 billion to subsidize FHA. He suggested cash down payments could be lowered to 1.5 percent to offset the loss of DPAs.
Jackson supports an increase in the FHA limit, currently $362,790, to the conforming loan limit, currently $417,000. But he opposes permanent higher limits for either FHA, Fannie Mae or Freddie Mac -- though he acknowledged the temporary increases in the economic stimulus package.
The secretary does, however, support an increase to the number of Home Equity Conversion Mortgages FHA can insure as well as allowing reverse mortgage on condominiums and purchase transactions, though he does oppose a proposed 1.5 percent cap on reverse origination fees.
Jackson does not want to see lenders or mortgage brokers with inadequate capital participate as correspondent lenders, as proposed in current legislation. The surety bond proposed in the bill would not provide any independent evaluation of financial stability, internal control systems, or compliance with FHA requirements.