H.R. 5072 Accomplishes Little

On June 10, the House passed H.R. 5072 by a landslide vote of 406-4. This bill is called the FHA Reform Act. The legislation was sponsored by Maxine Waters (D-Cal.).

The White House pushed it:

The boss over at HUD, Shaun Donovan loved it:

"I am grateful to the members of Congress who worked diligently on this bill - specifically, Housing and Community Opportunity Subcommittee Chair Maxine Waters, Financial Services Committee Chair Barney Frank and Subcommittee Ranking Member Shelley Moore Capito. We look forward to quick action by the Senate on this proposal to encourage responsible home ownership while further reducing risk to the American taxpayer."

We know the FHA is having problems. The director, David Stevens made these remarks a month ago:

On the mortgage market in general:

“This is a market purely on life support, sustained by the federal government.”

On FHA’s exploding balance sheet:

“Having FHA do this much volume is a sign of a very sick system.”

On the status of FHA’s “book”:

"FHA has been taking steps to shore up its program after being left with “terrible portfolios” from 2007 and 2008."

It is high time that Congress started addressing the problems with the D.C. Mortgage lenders. I think they missed a chance. But given that Barney Frank was involved it is not surprising.

There is nothing in this legislation that restricts the FHA from insuring up to 96.5% of a mortgage. The window to buy a home with government financing with less than 5% down is still open.

While there may be social implications to this that some consider to be beneficial, it has nothing to do with the soundness of FHA and the financial risk to the taxpayers. We are the only country in the world that has a program like this.Why is is the US government continuing to be the only provider of junk mortgages?

The excesses that followed as a result of the availability of 100% financing were contributing factors to the blow up of 2008-09. It would appear that we have learned very little from that experience. That’s too bad. It cost us $2 trillion so far.

Some of the language in the bill:

Sec. 2)
Amends the National Housing Act to authorize the Secretary of Housing and Urban Development (HUD) to increase the maximum annual premium payments for mortgage insurance, and make the charging of them discretionary instead of mandatory.

Increasing fees would make a difference. It would be a step in the direction of getting the private sector back involved. But they make the fees “discretionary”. Read this to mean that we will not see these higher fees for at least two more years. What a cheap way out. Pass the buck.

(Sec. 3)
Authorizes the Secretary to require specified mortgagees to indemnify HUD for payment of a mortgage insurance claim if the mortgage was not originated or underwritten in accordance with HUD requirements. Authorizes the Secretary to require a mortgagee to indemnify HUD for loss regardless of when an insurance claim is paid if fraud or misrepresentation was involved in connection with the mortgage origination or underwriting.
(Sec. 4)
Authorizes the Secretary to terminate approval of a mortgagee to originate or underwrite single-family mortgages if the mortgagee's rate of early defaults and claims is excessive.

This is nice. Just a question. What did they have before? They had no ability to go after someone who was generating bad paper? That is not correct. Go to the press releases. They have been filing enforcement actions against mortgage lenders for years.

(Sec. 6)
Establishes within the Federal Housing Administration (FHA) a Deputy Assistant Secretary for Risk Management and Regulatory Affairs responsible for all matters relating to managing and mitigating the risk to HUD mortgage insurance funds and for ensuring the performance of HUD-insured mortgages. Abolishes the position of the FHA chief risk officer.

It’s like a joke. They get rid of one risk officer and replace him with a new one. Someone will get a nice new office. FHA does not need a new risk officer. It needs a lower risk profile. It is not hard: Charge a market rate, do not exceed 80% LTV and only insure borrowers who have the ability to pay. Why should the government take so much risk that we need new and important risk managers? Just get rid of the risk.

(Sec. 7)
Authorizes the Secretary to use outside sources to:
(1) analyze credit risk models and practices employed by HUD in connection with mortgages;
(2) evaluate underwriting standards; and
(3) analyze lender compliance with, and HUD enforcement of, underwriting standards.

Oh boy. I don’t like this one. This means that private vendors will get fat. But who? This is just an opportunity for “leakage”. We have Fannie, Freddie, FHLB and FHA with $7 trillion of mortgages that they “own”. They have 70% of the outstanding mortgages. And we have to buy outside databases to evaluate it? What are they doing down there?

(Sec. 12)
Prescribes conditions compelling the Secretary to review and reduce certain cash investment requirements (down payment requirements) binding upon mortgages or mortgagors.

Reduce down payment requirements? I thought this was about protecting the taxpayers?

Following the expiration of the housing tax credit last month home sales in many regions fell by 20-30%. Mortgage rates are at record lows, yet applications are way off. The housing market has a wall of worries. We are not out of the woods. A second leg downward is possible. Should that happen the FHA would need a bailout. It could happen as early as 2011. H.R. 5072 does little to minimize that risk. If anything, it just kicks the can down the road a bit longer.


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