FHA Makes Concessions to Gain Backing of Sen. Corker

The Federal Housing Administration's Acting Commissioner Carol Galante agreed to four major changes to the embattled agency's policies in order to secure the backing of Sen. Bob Corker, R-Tenn., for her nomination and for an FHA reform bill.

In a letter to Sen. Corker on Tuesday, Galante said FHA would stop insuring loans for a popular reverse mortgage program for seniors by the end of January and will raise down payment requirements on high-priced loans above $625,500. FHA also will increase enforcement of FHA lenders that solicit borrowers who have gone through foreclosure and "automatically" qualify so-called rebound buyers for an FHA loan.

The changes are concessions to Corker, who was standing in the way of Galante's nomination to head the agency. Galante was nominated in July 2011 but has not yet been confirmed. They also are highly unusual because typically FHA announces policy changes through what are known as Mortgagee Letters that are posted on its website and sent to approved lenders,

"This is definitely a quid pro quo," says Isaac Boltansky, a policy analyst at Compass Point Research and Trading, who has been handicapping the FHA reform efforts in Congress. "I think this increases the chance of reform because Corker represented a potential block of unanimous consent for the FHA bill and now he's on the team."

Boltansky says Corker's support could help clear a path for the passage of an FHA reform bill that Banking Committee Chairman Tim Johnson, D-S.D., wants the Senate to approve by the end of this year. The bill includes 17 different proposals that would help FHA plug an estimated $16.3 billion shortfall and forestall the agency from asking for a bailout from the Treasury Department.

In a statement Tuesday, Corker said he would now support Galante's nomination and said her proposals are "a good first step" toward broader FHA reform.

"I am encouraged that Acting Commissioner Galante has committed to structural reforms that we both believe put FHA in a much stronger position," Corker said. "Given the reforms she is committed to, I believe that having an accountable commissioner with her resolve and expertise will be in the best interest of the taxpayer."

While the Senate Banking Committee gave preliminary approval last week to confirm Galante, some Republicans, including Sen. David Vitter, R-La., oppose her confirmation.

Vitter introduced his own bill last year to overhaul the FHA, and reform gained new urgency in November, when an independent audit found that FHA's capital reserve ratio — which measures reserves held in excess to cover projected losses — fell into negative territory of -1.44% at Sept. 30. By law, FHA must maintain at least a 2% capital reserve.

Negotiations to shore up the FHA's finances began almost immediately after a contentious Senate hearing on Dec. 6, when lawmakers hammered Housing and Urban Development Secretary Shaun Donovan for not doing enough to avoid a taxpayer bailout. HUD oversees FHA.

At the Senate hearing, Corker now infamously told Donovan: "You are losing your shirt on reverse mortgages." Corker also grilled Donovan on why FHA would approve loans to borrowers who had recently gone through foreclosure. The hearing reignited negotiations between Corker's office, HUD and the FHA, Boltansky says.

Galante wrote in the letter that FHA is preparing a policy directive that would result in the "immediate cessation" of its Standard Fixed Rate Home Equity Conversion Mortgage, or HECM, program.

Management of the program has been a major embarrassment since nearly 1 in 10 reverse mortgages are now in default. Seniors are allowed to take out 80% or more of maximum amount in one lump sum by tapping the equity in their homes, but many failed to set aside enough cash to pay for taxes and insurance.

That product contributed to the HECM program's negative economic value of $2.8 billion as of Sept. 30, the actuarial report found. Two other reverse mortgage products would still be available.

Among the other changes, FHA is finalizing a formal policy that will require borrowers with credit scores below 620 to have a maximum total debt-to-income ratio no greater than 43%. The change would reduce claim rates by roughly 20% for borrowers with credit scores of 620 or below, Galante wrote in the letter. The change in credit score and debt-to-income ratio also will apply to borrowers who have gone through a foreclosure.

FHA also will implement a policy change that lowers the maximum loan-to-value ratio on loans above $625,500 to 95% from 96.5% essentially raising the down payment for such loans to 5% from the current 3.5%.

In the letter, Galante wrote that she shared Corker's "sense of urgency about these matters," and committed to taking additional actions by Jan. 31, 2013.

"I have confirmed that the [Obama] Administration will support these new policies," she wrote. "You have my word on this and I expect to be held accountable to perform."