Oral Testimony of Secretary Shaun Donovan
Hearing Before The House Committee on Financial Services
Status of The FHA Mutual Mortgage Insurance Fund and FY 2011 Actuarial Report

Thursday, December 1, 2011

Thank you, Chairman Bachus, Ranking Member Frank, and members of the Committee, for this opportunity to testify on the status of the FHA MMI fund and the FY 2011 Actuarial report.

Before I begin, I want to say a quick word about the Ranking Member, who announced his retirement this week. You've never exactly been the "retiring" type, Congressman, so I know you'll be the same passionate and effective advocate for families on Main Street you always have been.

Mr. Chairman, certainly, this report arrives in a very different environment from the one we faced upon taking office.

Then, our economy was shedding 753,000 jobs per month. Housing prices had fallen for thirty straight months.  And foreclosures were surging to record levels month after month.

Today, nearly 13 million homeowners have refinanced their mortgages since April 2009 - putting nearly $22 billion a year into the hands of families and our economy. And with recent changes from FHFA, more refinances are on the way.

Today, because we provided responsible families opportunities to stay in their homes, foreclosure starts are down 45 percent since early 2009. More than 5.3 million mortgage modifications have been started in that time.

Central to this progress has been the FHA - taking over 1 million loss mitigation actions to help families keep their homes and helping 2.25 million first time homebuyers realize the dream of homeownership - 56 percent of all first-time homebuyers the last two years, and 60 percent of African American and Hispanic homebuyers last year alone.

And as the actuarial report we discuss today finds, while we all have been through the second worst housing downturn in the history of the country, FHA-unlike many other institutions-retains a positive fund balance and the current book of business is strong.

Specifically, the actuary reports insurance on loans booked since January 2009 post an estimated net economic value of $18 billion, with the new 2012 book of business expected to add $9 billion alone.

It reports that although the Capital Reserve Account is $4.7 billion, FHA's total reserves stand at $33.7 billion - $400 million more than in 2010.

That the FHA has been able to weather this storm to date is no accident. Indeed, with the partnership of Congress and this Committee, we have been able to put in place the most sweeping reforms to credit policy, risk management, lender enforcement, and consumer protections in FHA history - reforms, as this actuarial report makes clear, that have produced real results.

With your help, we have been able to increase premium rates three times under this Administration, yielding significant added revenue to the Fund.

We also put in place a "two-step" FICO floor, which requires those with credit scores below 580 to contribute a minimum down payment of 10 percent.  Only those with stronger credit scores are eligible for FHA-insured mortgages with the minimum 3.5 percent down payment. This approach is based upon FHA data that clearly shows that the success of a borrower depends on a combination of factors.

The changes we've made have significantly improved the quality and performance of FHA loans. Where nearly half of FHA borrowers had credit scores below 620 in 2007, today the average FHA credit score across all borrowers is over 700 for the first time in FHA history.

For home purchase loans originated in early 2011, early payment default rates are less than one-sixth what they were in early 2008 - and for streamline refinance loans, they're one-twelfth of what they were at their peak before President Obama took office.

We have taken other steps to protect the Fund as well, including critical steps to enhance lender enforcement - withdrawing the approval of over 1,600 lenders to participate in FHA programs, more than four times the number during the entire tenure of the previous Administration.

With these actions, we are sending lenders a very clear message: that if you don't operate ethically and transparently, we won't do business with you. And we will not hesitate to act.

Mr. Chairman, the collective impact of these efforts cannot be overstated. Indeed, were it not for these reforms-many of which this Committee has helped make possible- FHA would be "in the red" today.

And on the strength of these new books of business, not only does the actuary report that the Fund retains positive capital today - it projects FHA should be able to rebuild reserves to the congressionally-mandated 2 percent threshold very quickly once markets across the county exhibit sustained growth.

Indeed, using base-case projections based on Moody's Analytics' forecast, the actuary expects capital reserves to reach 2 percent again in 2014, sooner than was projected just last year.

Of course, for all this progress, real challenges remain.

Like most of the housing finance sector, the actuary finds that FHA's finances are closely tied to home prices, which have been broadly stable since we took office, but weaker than expected in 2011.

In particular, it finds FHA's older books of business underwritten during the bubble years of 2000-to-2008 will continue to produce substantial losses - of more than $26 billion. It reports as many as half of the highest-risk loans insured at the peak of the housing bubble will ultimately result in a loss for the FHA, with more than 1 out of every 4 loans insured in 2007 resulting in an insurance claim, and losses of close to $10 billion for the 2008 book of business alone.

That's why we continue to pursue additional reforms that protect the taxpayer, support the housing market and meet FHA's historic mission of helping underserved borrowers.

In the very near future, we expect to publish an indemnification rule to hold lenders in FHA's Lender Insurance program responsible for loans that were improperly originated, or in which fraud or misrepresentation were involved. In addition, we'll soon publish a rule that reduces allowable seller concessions to protect the MMI Fund from risks associated with inflated appraisal values.

Now that we have these actuarial results, we are carefully examining a range of additional steps to further strengthen the fund, including enhancements to our loss mitigation protocols and whether additional premium increases are necessary. We expect to announce next steps in the coming months and will work with Congress, as we have throughout.

We also must continue to shrink government's footprint - a key goal of the Administration's White Paper on the future of housing finance and a process I'm pleased to report that has already begun at the FHA through our premium increases and underwriting changes.

Indeed, while FHA's volume grew dramatically during this crisis, in FY 2011 FHA loan volume was down 34 percent from its peak in 2009. FHA's current market share of mortgages is 14 percent and declining for the first time since 2006. During these uncertain times, as we carefully manage the balance between helping the market recover and working to bring private capital back, this represents important progress.

And so, Mr. Chairman, while no one can predict what the future will hold, what we do know is that the new loans we are making are the strongest in FHA history.

But given the continuing fragility of the market, we must continue to be vigilant - and prepared to take additional steps to protect the taxpayer. As it has been since the outset of this Administration, that remains our goal today. Thank you.

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