WASHINGTON — The House is expected to pass a bill today to recapitalize the Federal Housing Administration by letting it raise annual premiums on borrowers.
The FHA has been backing a growing number of loans during the financial crisis, accounting for nearly 30% of new mortgages in fiscal 2009, and 20% of all refinancings. But the agency's loan losses have depleted its capital reserves, leaving its Mutual Mortgage Insurance Fund with a capital ratio of 0.53%, well below its statutory minimum of 2%.
The Obama administration and the banking industry are hopeful the bill can help recapitalize the FHA.
"In order to ensure that FHA can continue to operate fiscally on its own two feet, it needs to make substantive changes," FHA Commissioner David Stevens said in an interview on Wednesday. "One of the provisions in this bill would allow us to raise our annual premiums and that will help us bring more capital into our capital reserves to strengthen our fund."
Under the bill, which was introduced by Rep. Maxine Waters, D-Calif., who chairs the Financial Services Committee's housing subcommittee, the FHA could raise its annual premium as high as 1.55% from the current cap of 0.55%. The FHA said it will not raise premiums to the new cap immediately. Instead, it said it will charge an annual premium of 0.90% for borrowers who make a down payment of 5% or less, and 0.85% for borrowers who put down more than that.
The FHA estimates the changes will generate an additional $4.1 billion for fiscal 2011.
"At the end of the day, the reality is that FHA's premiums are too low to be doing financing at the levels they do it and to serve its mission effectively," Stevens said. "Raising the premiums is a critical component to making sure we are collecting the appropriate revenue for the risk of each loan and with enough additional coverage to protect us in the event of a drain on our capital."
The bill would also force the FHA to lower the up-front premium, which it has increased during the past year as losses have multiplied. Under the legislation, the up-front premium could be no higher than 1%, down from a previous cap of 2.25%. Industry analysts said that change was significant. Raising the up-front premium provided a higher barrier to purchasing a home for some borrowers and made it harder for others to recoup their costs if they were forced to sell within a few years.
"It's better to have it be an annual fee than to have a large up-front fee that has to be financed," said Jaret Seiberg, an analyst with Washington Research Group, a division of Concept Capital. "With an up-front fee, if the borrower has to sell the house in the first couple of years, when you take into account commissions, you basically need several percentage points in price appreciation to come out even. The bill gives the FHA more flexibility in pricing, which means it can bring in more revenue and preserve the amount of equity borrowers have in their homes."
Stevens agreed. "The problem with the current structure is that it is flat out unfair," he said. "If a borrower is not in their home long term, they pay a huge premium on the front end which they don't recoup."
The bill would also provide the FHA with enhanced authority to terminate lenders' ability to originate or underwrite loans backed by the FHA when the agency finds evidence of fraud or noncompliance. It would also require the agency to improve its internal reporting systems to better manage risk, including monitoring of early defaults and tracking mortgage information by loan, and improve the transparency of its data to the public and Congress.
Debate on the bill began Wednesday, and it will likely pass today with bipartisan support. Republicans were planning to introduce several amendments, most of which were likely to be rejected, that would require higher down payments by borrowers, enact stricter loan limits and cap the FHA's market share.
The administration opposes the amendments. "Some of these amendments, quite frankly, would hurt the housing market, hurt the economic recovery, and hurt the mission of FHA," Stevens said. "The bill as it is currently structured is the right bill."
Rep. Tom Price, R-Ga., was pushing an amendment to limit the FHA's new origination market share to 10% of all privately originated home loans each year. Rep. Scott Garrett, R-N.J., was planning to introduce amendments that would include raising the down payment for borrowers from 3.5% to 5% and prohibit financing on up-front premiums.