After reconciling their differences on the proposed legislation last week, Sen. Tim Johnson, D-S.D., chairman of the Senate Banking Committee, and Sen. Mike Crapo, R-Idaho, the committee's ranking Republican, have introduced a draft bill which, if approved, will improve the Federal Housing Administration's (FHA) ailing financial health by strengthening its underwriting standards, enhancing its lender accountability measures and reforming its reverse mortgage program.
The Federal Housing Administration Solvency Act of 2013 would create an advance 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 bi-partisan 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. The draft bill, however, does not state how much revenue the premiums would provide.
‘This increased accountability and transparency will help ensure taxpayers are not unexpectedly left on the hook for bailouts,’ Johnson and Crapo said in a joint statement.
The bill would also 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 only get loans they can afford.
In addition, the proposal would give HUD new tools to hold lenders accountable for issuing inappropriate or fraudulent mortgages. Currently, HUD is limited in the damages it can seek from bad actors in the mortgage market.
The proposal would also require HUD to consolidate guidelines for lenders and servicers regarding the requirements, policies, processes and procedures that apply to loans insured by the FHA.
The bill would also 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.
Last week, Sens. Johnson and Crapo announced that they had reached an agreement on the legislation.
‘Our bill will give the FHA the tools it needs to get back on stable footing and strengthen a program important to many Americans, and I look forward to working with the rest of the committee to move this legislation forward,’ Johnson said in a statement.
David Stevens, president and CEO of the Mortgage Bankers Association, said the bill would ‘ensure FHA continues to fulfill its traditional role as a critical source of affordable credit for first-time home buyers and working families.’
‘The FHA Solvency Act of 2013 contains common-sense reforms that will help shore up FHA's finances,’ Stevens said. ‘As we continue to analyze the bill, we may suggest some fine-tuning of specific provisions. We support the direction of this legislation and look forward to working with the chairman and ranking member as the committee considers their proposal in the coming days and weeks.’
Frank Keating, president and CEO of the American Bankers Association, said the draft bill ‘furthers the important task of placing FHA on a sound financial footing and ensuring that its programs remain viable options for future generations.’
‘One of these key reforms, using underwriting standards based on the CFPB's Qualified Mortgage rules, makes it that much more imperative that the CFPB gets the QM rules right – and that sufficient time is allowed for it to do so,’ Keating added.
Should the Banking Committee approve the bill, it will next move on to the full Senate for an up-or-down vote. It is unclear whether the bill has enough votes to pass.
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