News late last week that the Federal Housing Administration (FHA) will need a $1.7 billion Treasury draw to help shore up its reserves as a result of recent losses in its reverse mortgage program and a reduction in endorsement volume gave proponents of FHA reform plenty of ammunition to support their claims that the agency has grown too large, isn't being managed properly, has strayed from its core mission and is taking on too much risk.
However, David Stevens, president and CEO of the Mortgage Bankers Association (MBA) and former assistant secretary for housing and federal housing commissioner at the Department of Housing and Urban Development (HUD), says the Treasury draw should not be viewed as a ‘bailout,’ per se, but rather a mandated account transfer that is required under the Federal Credit Reform Act (FCRA).
In fact, the FHA technically might not even need the Treasury draw, Stevens says, as it has taken steps to increase revenue and shore up its reserves, including increasing insurance fees, limiting the size of lump sum payments in its reverse mortgage program and implementing stricter underwriting standards to ensure borrowers won't default on mortgages, among other measures. However, under credit reform rules, the fruits of those efforts cannot be factored into the accounting of the agency's finances until after its fiscal year ends on Sept. 30 – therefore the agency has no choice but to take a Treasury draw to cover the current deficit in its reserve fund.
‘The unique thing about the FHA's accounting – which is required under credit reform (FCRA) rules – is that it must have, in its reserves, enough money to pay all forecasted claims, based on forecasting data that was in its actuarial report as of last November,’ Stevens says. ‘That's for the full 30 years of the mortgage. So it's not like your typical bank or GAAP accounting, where you reserve for a few years. In this case, the agency must be able to cover 30 years of losses, and have that all put away, based on forecast data.’
Last November, the independent actuarial firm that developed the FHA's forecast data presented a report showing the FHA's insurance fund operating at a deficit of $16.3 billion. The findings of that report, Stevens says, are what served as the basis for the Treasury draw of $1.7 billion.
Stevens says had the actuarial firm been allowed to conduct a reforecast in recent weeks, its report would likely show that ‘there's no need for a draw.’
‘But, unfortunately, that's not how credit reform works,’ he says. ‘The FCRA rules say that as of when the FHA does the books, it must have 'X' amount of dollars in its reserve account – and by the end of the fiscal year, it must have the required reserves in its account one way or another – either you put in the premiums or you have to take a draw.’
‘The reality is that the FHA has been performing better,’ Stevens adds. ‘Claims rates are lower and recovery rates are better than forecastedâ�¦ ‘
In her letter to Congress last week, FHA Commissioner Carole Galante pointed out that changing market conditions will also likely result in an improvement in the agency's fiscal picture by the end of this year. These factors include a 15% reduction in delinquency rates, a 91% reduction in early payment defaults, a 20% reduction in foreclosure starts and a 26% improvement in recovery rates on defaulted assets. She points out that the improvement in recovery rates alone is worth more than $5 billion.
Stevens points out that the FHA currently has reserves in excess of $32 billion – enough to cover claims and operational expenses ‘for decades.’
‘There's no reason why they need [the draw] now – the actuaries are right, even in the worse case scenarios it would be decades before they need that money,’ he says. ‘And, unfortunately the variables they used in that actuarial were much more conservative compared to what's actually happening in the portfolio. I think we'll see that reflected in the actuarial that's done at the end of this year – it will likely show that they never needed the draw in the first place.’
So if the actuarial report shows that the FHA didn't need a draw after all, what then? Can it return the money to the Treasury?
‘Unfortunately, it cannot,’ Stevens explains. ‘Because under credit reform – and this is Washington speak – it's not like a normal business where you would say, 'we took an advance and now we're going to pay it back because we don't need it.' If [HUD Secretary Shaun Donovan] had the option, I think he'd say 'we don't need the advance right now – let's talk about it in a year.' Why draw money you don't need when you have decades of reserves built in?’
But FHA has what's called ‘permanent and indefinite authority’ to draw from the Treasury.
‘It's not a loan – it's appropriated funds,’ Stevens says. ‘So there's no repayment. HUD can't give it back – it doesn't have the regulatory authority.’
Stevens says when the next forecast comes out in December, following the draw, ‘it will probably show that [the FHA] has excess funds,’ meaning above the 2% capital reserve requirement.
‘But all that money sits in the Treasury anyway,’ he explains. ‘So, at that point the Treasury can sweep any excess proceeds back, if it wants to.’
But the Treasury may also decide to let the FHA keep the extra funds in its reserve account.
‘In fact, if you look at the history of the FHA, there have been times when it had well over 5 percent in excess funds, and the Treasury didn't come in and sweep it all away,’ he says.
Stevens says statements from proponents for FHA reform that the agency is sinking financially are overblown.
‘Every year since 2009 that the FHA's finances have been scored or assessed by the Office of Management and Budget and the Congressional Budget Office, they come out as producing billions in additional profits,’ Stevens says. ‘The current portfolios are massively profitable. It's just that legacy portfolio from 2006 to 2008 that's been painful for FHA all the way through. Despite the fact that they are replenishing the fund at a faster rate and have been originating better loansâ�¦ they missed it by just a hair hereâ�¦ ‘
So will the government shutdown delay the FHA's $1.7 billion bailout?
‘My assumption is that they won't have the manpower in place to either make the draw on the Treasury side or receive the draw on the HUD side,’ Stevens says. ‘I don't know for certain, but I would imagine that [the transfer] would have to wait until after Congress restores the budget – which will likely be a matter of a few days.’
HUD's contingency plan states that, as per the U.S. Constitution, ‘No money shall be drawn from the Treasury, but in consequence of appropriations made by law,’ in the event there is a government shutdown.
It further states that ‘the Antideficiency Act prohibits all officers and employees of the federal government from entering into obligations in advance of appropriations and prohibits employing federal personnel except in emergencies, unless otherwise authorized by law.’
Stevens points out that ‘the impact from a government shutdown on FHA operations is a far greater concern than the draw from the Treasury.’ As of Wednesday it was reported that the FHA was still processing mortgages, albeit at a much slower pace and with a skeleton staff.
Despite the ‘technicalities’ stemming from FCRA rules, proponents for FHA reform have asserted that the bailout would have never been necessary if reserves were properly maintained and the agency was properly managed.
‘This failure reinforces the need for Congress to pass FHA and broader housing finance reform,’ Sen. Mike Crapo, R-Idaho, said in a statement on Friday, immediately after it was announced that the FHA would need a bailout. ‘Taxpayers have already been forced to provide hundreds of billions of dollars to Fannie Mae and Freddie Mac. FHA requiring nearly $2 billion for this year suggests that predictions of billions more in taxpayer liability could come to pass if we do not act on serious reform now."
Earlier this year, Sen. Crapo, a ranking member of the Senate Banking, Housing and Urban Affairs Committee, along with Sen. Tim Johnson, D- S.D., chairman of the committee, introduced the FHA Solvency Act of 2013, a bipartisan bill that would give the FHA the tools it needs to improve its financial condition, including strengthening underwriting standards, enhancing lender accountability measures, and reforming its reverse mortgage program. The bill has already passed in committee.
FHA reform is also proposed as part of the Protecting American Taxpayers and Homeowners (PATH) Act, a Republican-backed housing finance reform bill introduced by House Financial Services Committee Chairman Jeb Hensarling, R-Texas, that would wind down government-sponsored enterprises Fannie Mae and Freddie Mac within five years, replacing them with a securitization platform, significantly reduce the size and scope of the FHA, and almost completely privatize the housing finance industry.
In February, Rep. Hensarling stated that if the FHA were a private financial institution, ‘likely somebody would be fired, somebody would be fined, or the institution would find itself in receivership.’ Instead, ‘it is merely, and merrily, on its way to becoming the recipient of the next great taxpayer bailout.’
‘It's time to return the FHA to its traditional mission of helping first-time home buyers and those with low and moderate incomes,’ Hensarling said, adding that the agency had become ‘the nation's largest subprime lender.’
Later in February the Government Accountability Office added the FHA to its list of ‘high risk’ government programs.
As such, the debate over whether the FHA is truly going broke or simply needs to get its financial house in order is expected rage on for a while longer.
