The Senate Banking Committee today overwhelmingly approved legislation introduced by committee leaders Sen. Tim Johnson, D-S.D., and Sen. Mike Crapo, R-Idaho, which, if approved, will improve the Federal Housing Administration's (FHA) ailing financial health.
Members voted 21-1 to advance the Federal Housing Administration Solvency Act of 2013, which would fortify the FHA's finances by strengthening its underwriting standards, enhancing its lender accountability measures and reforming its reverse mortgage program. The agency is facing a shortfall of nearly $1 billion in its insurance fund this year after defaults on loans in its reverse mortgage program depleted its reserves.
Senator Tom Coburn, R-Oklahoma, was the only committee member to vote against the proposed bill, which now advances to the Senate floor.
The bi-partisan proposal would create an early warning system by raising the minimum for the Mutual Mortgage Insurance Fund's capital reserve ratio to 3%. If the capital ratio does not meet certain targets as it builds to the new minimum ratio, the bill would require the Department of Housing and Urban Development (HUD) to take immediate action to address the shortfall. In addition it would require the FHA to keep Congress up-to-date on its finances.
The bill would also increase the required minimum annual mortgage insurance premiums to improve the long-term solvency of the FHA. The premium levels will be re-evaluated each year to ensure premiums adequately cover potential risk and maintain the capital reserve ratio. Thus, it would help prevent the need for a taxpayer bailout of the FHA by stemming future losses.
In addition the bill would require HUD to evaluate and revise, as necessary, underwriting standards using criteria similar to the Consumer Financial Protection Bureau's qualified mortgage rule. Similar to the CFPB's ability-to-repay rule, this measure is designed to ensure borrowers get only loans they can afford.
Perhaps most importantly, the bill would give HUD more regulatory power to stabilize the FHA's reverse mortgage program, which has been hemorrhaging cash for the past several years as seniors collect their reverse mortgage payments in lump sums and then default on their loans.
The bill is expected to pass in the Senate; however, a date has not yet been set for a vote on the proposal.
In a related development, the Senate late Tuesday approved the Reverse Mortgage Stabilization Act, which gives the Department of Housing and Urban Development (HUD) authority to modify the Federal Housing Administration's (FHA) reverse mortgage program (also known as the Home Equity Conversion Mortgage or HECM program) in order to stem losses.
The FHA-backed legislation will likely need to be reconciled with a similar bill introduced in the Senate by Sen. Robert Menendez, D-N.J. The HECM Stabilization Act of 2013 would require a more thorough financial assessment of borrowers, restrict the utilization of principle, and increase tax and insurance fees on the loans in order to protect the FHA from further losses that will ultimately be borne by taxpayers.
The FHA has until Sept. 30 to decide whether it will need a bailout from the Treasury, which would not require congressional approval. Should that happen, it would be the first bailout for the agency in its 79-year history.
In an effort to increase revenue, the FHA recently increased its mortgage insurance premiums and started requiring most borrowers to carry the insurance for the duration of their 30-year loans.
It's important to note that the the proposed legislation does not prescribe steps to stem the FHA's losses, rather it would give HUD the rulemaking authority it needs in order to make adjustments to the program.