The Federal Housing Administration is ‘destined’ for a taxpayer bailout in the next two to three years, a former Fannie Mae chief credit officer (CCO) testified before a House subcommittee Thursday.
Edward Pinto, a real estate financial services consultant who served as Fannie's CCO in the late 1980s, told the Housing and Community Opportunity Subcommittee that the FHA's increased market share, larger loans and history of fraud support his projections that the agency is going the way of Fannie Mae and Freddie Mac.
The FHA, which recently announced it would soon hire its first chief risk officer, is being watched closely by lawmakers following the agency's prediction that its capital reserve ratio would fall below the congressionally mandated 2%.
FHA Commissioner David Stevens, also testifying before the subcommittee, repeated his denial that the FHA will need bailing out.
"Let me simply state at the outset that, based on current projections, absent any catastrophic home price decline, FHA will not need to ask Congress and the American taxpayer for extraordinary assistance – we will not need a bailout," he said in prepared remarks.
Stevens noted recently announced credit policy changes – including an increase in lender net worth – that take effect in 2010 as steps the agency has taken to strengthen its position. While saying such changes were "long overdue," Pinto described the FHA's efforts as "little more than Band-Aids."
Pinto also countered Stevens' suggestion that, because average FHA borrower credit scores have increased, the agency's financial health has improved. The average FICO scores for FHA borrowers is 693. In 2007, that number was 633. Pinto said the increase does not translate into better loan performance.
"Also troubling is the fact that the Fair Isaac Corporation reports that a 690 FICO score on a mortgage originated in October 2008 performs like a 645 FICO score on a mortgage originated in October 2007 and a 630 FICO originated in 2005-2007," he said. "As a result, on a FICO risk basis, FHA's risk has not improved."