[Senate Report 113-129]
[From the U.S. Government Publishing Office]
Calendar No. 275
113th Congress Report
SENATE
1st Session 113-129
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FHA SOLVENCY ACT OF 2013
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December 19, 2013.--Ordered to be printed
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Mr. Johnson of South Dakota, from the Committee on Banking, Housing,
and Urban Affairs, submitted the following
R E P O R T
[To accompany S. 1376]
The Committee on Banking, Housing, and Urban Affairs,
having had under consideration S. 1376, a bill to improve the
Federal Housing Administration and to ensure the solvency of
the Mutual Mortgage Insurance Fund, and for other purposes,
having considered the same, reports favorably thereon with
amendments and recommends that the bill, as amended, do pass.
INTRODUCTION
On July 31, 2013, the Senate Committee on Banking, Housing,
and Urban Affairs considered S. 1376, entitled ``FHA Solvency
Act of 2013,'' a bill to improve the Federal Housing
Administration and to ensure the solvency of the Mutual
Mortgage Insurance Fund, and for other purposes. The Committee
voted to report the bill, as amended, to the Senate.
BACKGROUND
The Federal Housing Administration was established by the
National Housing Act of 1934 as a response to the rapidly
declining housing market during the Great Depression. It
provides pooled mortgage insurance for loans made by FHA-
approved lenders throughout the United States and its
territories. In providing access to affordable mortgage credit,
FHA plays a countercyclical role in the housing market by
expanding when private capital is out of reach and contracting
when private capital is willing to offer borrowers affordable
terms. FHA also plays a crucial role in providing access to
credit for first-time homebuyers and middle income families
during all economic conditions. FHA pays claims on insured
single-family loans, and since Fiscal Year (FY) 2009, Home
Equity Conversion Mortgages (HECMs) and condominium loans
through its Mutual Mortgage Insurance Fund (MMI Fund). The MMI
Fund is required to be self-supporting, using premiums and
other fees it earns on insured loans to pay for claims and
other costs related to those loans rather than appropriations.
Beginning in 2007, as lenders and private mortgage insurers
began pulling back from the housing market, FHA dramatically
increased its market share to fulfill its countercyclical role
to stabilize credit markets in times of economic disruption.
Hearing witnesses cited an estimate that the recent housing
crisis would have been exacerbated without FHA, as home values
would have fallen an additional 25 percent and 3 million more
jobs would have been lost.\1\
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\1\Addressing FHA 's Financial Condition and Program Challenges,
Part II: Hearing Before the Committee on Banking, Housing, and Urban
Affairs, United States Senate, 113th Cong. (2013) (written testimony of
Gary Thomas, President, National Association of Realtors and Sarah
Rosen Wartell, President, Urban Institute); Oversight of FHA: Examining
HUD's Response to Fiscal Challenges: Hearing Before the Committee on
Banking, Housing, and Urban Affairs, United States Senate, 112th Cong.
(2012) (written testimony of The Honorable Shaun Donovan, Secretary,
U.S. Department of Housing and Urban Development).
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As a result of the housing crisis and the corresponding
increase in FHA's portfolio, default rates rose, particularly
on loans originated during the 2007-2009 time period, and on
loans guaranteed through the HECM program. The rise in default
rates led to an increase in FHA's actual and expected losses,
requiring FHA to use its capital reserves to pay for claims on
the MMI Fund, which in turn reduced FHA's capital reserve ratio
below the two percent level required by statute. This decline
started in FY 2006, leading to a negative 1.44 percent ratio in
FY 2012. During this time, FHA took actions to reduce the
severity of their losses on defaulting loans and raised
insurance premiums. These actions and an improving economy over
the past year boosted the capital reserve ratio levels.
However, based on data in the FY 2013 independent actuarial
report, FHA reported its capital reserve ratio remains negative
but is projected to achieve the mandatory two percent in FY
2015.
PURPOSE OF THE LEGISLATION
The FHA Solvency Act of 2013 will strengthen and improve
the Federal Housing Administration to protect the solvency of
the Mutual Mortgage Insurance Fund. While FHA has taken steps
in recent years to improve the safety and soundness of the
program and tighten oversight of FHA approved lenders,
additional authority was requested to ensure the solvency of
the MMI Fund.
HEARINGS
On July 24, 2013, the full Committee held a hearing titled
``The FHA Solvency Act of 2013,'' to discuss S. 1376. FHA
Commissioner Carol J. Galante, Assistant Secretary of the U.S.
Department of Housing and Urban Development, testified at the
hearing.
On February 28, 2013, the Committee held a hearing
entitled, ``Addressing FHA's Financial Condition and Program
Challenges, Part II.'' The hearing discussed actions FHA could
take to mitigate losses to the MMI Fund. Witnesses were: Mr.
Gary Thomas, President, National Association of Realtors; Mr.
Peter Bell, President, National Reverse Mortgage Lenders
Association; The Honorable Phillip L. Swagel, Professor in
International Economic Policy at the Maryland School of Public
Policy, University of Maryland; Ms. Sarah Rosen Wartell,
President, Urban Institute; Ms. Teresa Bryce Bazemore,
President, Radian Guaranty Incorporated; and The Honorable
David H. Stevens, President and Chief Executive Officer,
Mortgage Bankers Association.
On December 6, 2012, the Committee held a hearing entitled,
``Examining HUD's Response to Fiscal Challenges.'' The witness
was The Honorable Shaun Donovan, Secretary, U.S. Department of
Housing and Urban Development. The hearing reviewed actions
taken by HUD to improve the fiscal health of the MMI Fund as
well as HUD requests for authority to take additional actions.
SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION
Section 1. Short title and table of contents
Section 2. Mortgage insurance premiums
This section amends section 203(c)(2) of the National
Housing Act. This section would require the Secretary to charge
a minimum annual mortgage insurance premium of at least 55
basis points. It also increases the annual premium cap by 50
basis points. This section also would require the Secretary to
evaluate premium levels at least annually to ensure that the
combined up-front and annual premiums for the life of a loan
will cover the expected risk to the fund and maintain the
mandated capital reserve ratio.
Section 3. Prohibition on insuring mortgagors with two prior
foreclosures
This section amends Section 203 of the National Housing Act
to prohibit FHA insurance on mortgages if the borrower was
foreclosed upon twice previously.
Section 4. Indemnification by FHA mortgagees
This section gives the Secretary the authority to seek
indemnification from mortgagees approved to originate loans
under the lender insurance program or the direct endorsement
program. Currently, the Secretary only has the authority to
seek indemnification from mortgagees under the lender insurance
program. To qualify for indemnification, the mortgage must have
a material defect that would have prevented the loan from being
insured or have involved fraud or misrepresentation. Except in
cases of fraud or misrepresentation, the loan must have been
delinquent within 36 months and resulted in a default. If the
Secretary determines that the fraud or misrepresentation was
committed by a third-party (not the mortgagee) and that the
mortgagee had adequate quality control practices and review
procedures to identify such fraud or misrepresentation, then
the mortgagee will not be required to indemnify the Secretary.
The Secretary is required to issue regulations regarding
requirements for mortgagees, public reporting of loans subject
to indemnification, and an appeals process.
Section 5. Review of mortgagee performance
This section amends Section 533 of the National Housing Act
to expand the criteria the Secretary uses to compare mortgagee
performance. This section also provides the Secretary with the
authority to terminate a mortgagee's approval on a national
basis. Currently, a mortgagee's approval can only be terminated
in a specific geographical area. The Secretary would also issue
regulations to establish an appeals process for a termination
decision.
Section 6. Transfer of mortgage servicing duties
This section permits the Secretary to issue rules requiring
an underperforming servicer to contract with a specialty
subservicer for a single mortgage or any pool of mortgages.
This section requires the following to be included in the
rules: the performance conditions that would trigger the
requirement to use a subservicer; a reasonable time period for
the servicer to fix the problem or problems before the
subservicer is required (unless the delay would harm the MMI
Fund); and the possibility of stricter penalties should the
servicer have similar problems for a third time. The rules must
also ensure the authority provided in this section only applies
to activities that may materially and adversely affect the
Secretary's ability to recover in the future and be limited to
mortgages that share similar underwriting, borrower, and
performance characteristics.
Section 7. Easing regulatory burdens; resource guide
This section directs the Secretary to establish a single
resource guide for lenders and servicers regarding the
requirements, policies, processes, and procedures that apply to
loans insured by FHA. This section also requires that the guide
be made publicly available and posted on HUD's website.
Section 8. Improving underwriting standards
This section directs the Secretary to evaluate and revise
as necessary FHA's underwriting standards using criteria
similar to the CFPB's criteria for Qualified Mortgages.
Criteria which the Secretary must evaluate include a borrower's
income and financial resources, monthly mortgage payment, other
debts, employment status (if employment income is included in
financial resources), debt-to-income ratio, and credit history.
Section 9. Ensuring adequate capital levels in the Mutual Mortgage
Insurance Fund
This section amends section 205 of the National Housing Act
to require that the MMI Fund achieve a capital reserve ratio of
3 percent within 10 years of enactment. It establishes
escalating reporting requirements and program evaluations that
take effect immediately if the capital ratio falls below
required levels depending on how undercapitalized the fund is
in comparison to the mandated capital reserve ratio. The fund
shall be designated as undercapitalized in the event that the
capital reserve ratio is less than 100 percent but not less
than 50 percent of the ratio required by statute. The fund
shall be designated as significantly undercapitalized in the
event that the capital reserve ratio is less than 50 percent of
the required ratio but not less than zero of the ratio required
by statute. And finally, the fund shall be designated as
critically undercapitalized in the event that the capital
reserve ratio is negative. With each designation this section
mandates escalating transparency requirements regarding the
state of the fund. It also sets out a process for additional
assessments of risk and additional premium surcharges as
applicable. The 6-month process for imposing premium surcharges
would apply if:
(1) the MMI Fund is critically undercapitalized 2
years after enactment of the FHA Solvency Act and
thereafter, as indicated in the actuarial report;
(2) after submission of the FY2016 actuarial report,
the MMI Fund has not achieved a 2 percent capital
reserve ratio;
(3) after the submission of the FY2016 actuarial
report but prior to the earlier of 10 years after the
date of enactment or the date the Fund achieves 3
percent, there is a decrease in the value of the ratio
from one report to the next, as determined by the
independent actuary, without a concurrent drop in
market share;
(4) the capital reserve ratio fails to achieve and
maintain 3 percent by the date that is 10 years after
enactment and thereafter, as indicated in the actuarial
report.
Section 10. Stress testing of the Mutual Mortgage Insurance Fund
This section amends Section 202 of the National Housing Act
to require the Secretary's annual report on the independent
actuary's study include an alternative stress test scenario,
which the Secretary shall develop. The alternative stress test
should be developed to help assess the financial status of the
Mutual Mortgage Insurance Fund, and may rely on assumptions
used by the Federal Reserve Board's Comprehensive Capital
Analysis and Review (CCAR) stress tests, if those assumptions
are relevant to the financial status of the MMI Fund. This
section does not limit how many alternative stress test
scenarios may be included. While any alternative stress test
scenario should be utilized to support sound financial planning
for the MMI Fund, the published results from these alternative
scenarios should not be binding for purposes of the MMI Fund
achieving mandatory capital reserve minimums.
Additionally, this section is not intended to restrain or
otherwise alter how the Federal Reserve Board and other
regulators design and administer stress tests, including those
required by the Dodd-Frank Wall Street Reform and Consumer
Protection Act, for entities they regulate.
Section 11. Congressional notification of use of certain authorities
with respect to the FHA
This section requires the Secretary of the Treasury to
notify the Committee on Banking, Housing, and Urban Affairs and
the Committee on Financial Services within 48 hours of
exercising its permanent, indefinite authority under 2 U.S.C.
661c(f) to fund re-estimates of the FHA's Mutual Mortgage
Insurance Fund. The Secretary of HUD is also required to notify
the same Committees within 48 hours of receiving funds pursuant
to the permanent, indefinite authority to cover a downward re-
estimate. Both notices must also be put on the websites of
Treasury and HUD. Any report that the HUD Secretary is required
to submit to Congress shall include the total amount that must
be paid back to Treasury.
Section 12. Establishment of Deputy Assistant Secretary and Chief Risk
Officer of FHA
This section creates a Chief Risk Officer within the FHA
and establishes the criteria for the position. It also requires
the Officer to conduct an annual study of the lowest performing
loans.
Section 13. Disclosure of events
This section requires the disclosure of any event that
occurs between the finalization of the Annual Actuarial Report
and the submission of the Annual Report to Congress that might
affect the report's findings. This disclosure shall be released
as an addendum to the Report to Congress with an accompanying
letter serving as a summary.
Section 14. GAO study on disclosures
This section would direct the GAO to examine HUD's
disclosure of FHA data and to consult with prominent academics
with housing market experience regarding the data that is
disclosed. The GAO is asked to make recommendations regarding
the data disclosed by the Secretary and to conduct a follow-up
study regarding implementation of the recommendations one year
after the study is complete.
Section 15. Stabilizing the HECM program
This section limits the Secretary's authority to change the
HECM program by mortgagee letter to only those changes that
involve escrow accounts or set-asides, financial assessments,
or loan limits. Any such changes by mortgagee letter must be
accompanied by a rulemaking. This will allow the Secretary to
make changes quickly without eliminating the option for public
comment. However, the Secretary's authority to use mortgagee
letters to change the HECM program will expire two years after
enactment of this section. This section also makes several
statutory changes to the HECM program. The Secretary must:
issue a rule eliminating the standard fixed-rate, full draw
option and mandating a financial assessment of the mortgagor
for any other fixed-rate full draw products; require an escrow
or set-aside account if doing so would mitigate the risk of
loss, given the mortgagor's financial situation; and submit
quarterly reports on the financial status of each product
offered under the HECM program to the Committee on Banking,
Housing, and Urban Affairs and the Committee on Financial
Services.
Section 16. Principal limit factor for HECM program
This section amends Section 255 of the National Housing Act
to tighten the principal limit on fixed rate home equity
conversion mortgages.
Section 17. Publication of final rules relating to limiting seller
contributions towards purchase related expenses
This section directs HUD to finalize their proposed seller
concessions rule.
Section 18. GAO study on FHA loan limits
This section requires the GAO to conduct a one-time study
on the principal loan limits for FHA-insured mortgages. The
study requires GAO to make recommendations on the methodology
to adjust the loan limits, taking into consideration inflation,
geographic price differences, and countercyclical demands.
COST OF LEGISLATION
CONGRESSIONAL BUDGET OFFICE COST ESTIMATE
Summary: S. 1376 would make several changes to current law
aimed at improving the financial safety and soundness of the
Federal Housing Administration's (FHA's) Mutual Mortgage
Insurance (MMI) fund. That fund records the transactions of two
housing programs operated by FHA: the single-family mortgage
guarantee program and the Home Equity Conversion Mortgage
(HECM) program. The bill would require FHA to take certain
corrective actions if the annual actuarial review of the MMI
fund indicates that the fund's capital ratio has fallen below
certain targets and would require FHA to make other
administrative changes to the processes they use to oversee the
single-family and HECM programs.
CBO estimates that implementing S. 1376 would result in a
net decrease in discretionary spending of $514 million over the
2014-2018 period, assuming enactment of appropriation laws
necessary to implement the legislation's provisions. This
legislation would not affect direct spending or revenues;
therefore, pay-as-you-go procedures do not apply.
S. 1376 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act (UMRA).
Estimated cost to the Federal Government: The estimated
budgetary impact of S. 1376 is shown in the following table.
The costs of this legislation fall within budget function 370
(commerce and housing credit).
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By fiscal year, in millions of dollars----
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2014 2015 2016 2017 2018 2014-2018
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CHANGES IN SPENDING SUBJECT TO APPROPRIATION
FHA Insurance Premiums:
Estimated Authorization Level.................. 0 0 0 0 -524 -524
Estimated Outlays.............................. 0 0 0 0 -524 -524
Other Costs:
Estimated Authorization Level.................. 2 2 2 2 2 10
Estimated Outlays.............................. 2 2 2 2 2 10
Total Changes:
Estimated Authorization Level.............. 2 2 2 2 -522 -514
Estimated Outlays.......................... 2 2 2 2 -522 -514
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Note: FHA = Federal Housing Administration.
Basis of estimate: For this estimate, CBO assumes that the
bill will be enacted near the start of calendar year 2014 and
that the necessary amounts will be appropriated each year.
FHA insurance premiums
Currently the MMI fund is required to maintain a 2 percent
capital ratio. (The capital ratio measures FHA's cash on hand
relative to the value of all outstanding mortgages insured by
the agency.) Enacting this legislation would require FHA to
evaluate the premiums it charges for mortgage insurance on an
annual basis and the MMI fund to achieve a capital ratio of 3
percent within 10 years of enactment. The legislation also
would establish additional reporting requirements and require
program evaluations and programmatic changes if the fund
doesn't meet certain targets as it builds towards the proposed
3 percent capital ratio over the next 10 years. For example,
FHA would be required to impose a surcharge of 10 basis points
on its guarantees if the actuarial report for fiscal year 2016
indicates that the capital ratio is less than 1.25 percent.
CBO estimates that under current law, FHA will charge
borrowers insurance premiums sufficient to maintain a capital
ratio that exceeds 1.25 percent in the next couple of years, so
we expect that, under the bill, FHA would not impose the 10
basis point surcharge in 2016. However, under the bill, CBO
expects that FHA would probably increase its initial and annual
insurance premiums beginning in 2018 in order to achieve a 3
percent capital ratio in the MMI fund by 2023; such increases
in premiums would result in an increase in offsetting
collections totaling $524 million in 2018 (and further
increases in collections in subsequent years), assuming
commitment authority to operate the single-family program is
included in future appropriation acts.
Other costs
Based on estimates of the cost of similar programmatic
activities, CBO estimates that the additional reporting
requirements and other administrative activities required to
maintain adequate capital balances in the MMI fund would cost
$10 million over the 2014-2018 period, subject to the
availability of appropriated funds.
Implementing S. 1376 would change various processes used by
FHA to oversee the single-family and HECM programs. The bill
would require FHA to:
Issue regulations to establish a nationwide
appeals process for terminating a borrower's approval;
Issue regulations related to loans subject
to indemnification; and
Alter the management of the HECM program
through letters to mortgagees and rulemaking
procedures.
The Government Accountability Office also would be required
to produce a report on the appropriate methodology for
adjusting FHA's loan limits and a report examining FHA's
procedures for disclosure of its housing program data.
Pay-as-you-go considerations: None.
Estimated intergovernmental and private-sector impact: S.
1376 contains no intergovernmental or private-sector mandates
as defined in UMRA and would impose no costs on state, local,
or tribal governments.
Estimate prepared by: Federal Costs: Susanne S. Mehlman and
Chad Chirico; Impact on State, Local, and Tribal Governments:
J'nell L. Blanco; Impact on the Private Sector: Paige Piper/
Bach.
Estimate approved by: Theresa Gullo, Deputy Assistant
Director for Budget Analysis.
REGULATORY IMPACT STATEMENT
In accordance with paragraph 11(b), rule XXVI, of the
Standing Rules of the Senate, the Committee makes the following
statement concerning the regulatory impact of the bill.
This legislation will not have a substantial regulatory
impact because it makes several changes to the administration
of the Federal Housing Administration (FHA), its programs, and
its authorities, but does not place requirements on businesses
or individuals directly. Changes to FHA programs may affect the
businesses or individuals who choose to participate in the FHA-
insured mortgage market.
CHANGES IN EXISTING LAW (CORDON RULE)
On July 31, 2013, the Committee unanimously approved a
motion by Senator Johnson to waive the Cordon rule. Thus, in
the opinion of the Committee, it is necessary to dispense with
section 12 of rule XXVI of the Standing Rules of the Senate in
order to expedite the business of the Senate.