Lawmakers raised renewed concerns Thursday over the future viability of the Federal Housing Administration (FHA), even as the agency's commissioner, David Stevens, touted some progress in restoring its depleted capital reserves.

During a Senate Banking Committee hearing on the agency's future, panel members said they were worried if the agency would ever get back on its feet given its growing share of the mortgage market.

"We want you to survive," said Sen. Richard Shelby, the leading Republican on the panel. "What's it going to take financially … not to be concerned about FHA? What's it going to take to allay these concerns?"

But Stevens offered some good news, even if he was cautious not to overplay it.
He noted that the agency's third-quarter report showed that the agency's Mutual Mortgage Insurance fund grew by $450 million, a significant boost from a projected decline of $2.6 billion during the first three quarters of the year.

Still, Stevens said the agency remains vulnerable if housing prices drop.

"We should all be concerned about FHA," he said. "I'm concerned about FHA. If home prices recover, the strength of the fund will grow quicker. If home prices recede and worsen depending on that pace, that will make the recovery much slower."

While there has been some progress, Stevens told lawmakers, "We remain cautious… the job is not yet done."

Congress enacted legislation last month that allows the mortgage insurance agency to raise annual premiums to help cover losses to its trust fund and reduce up-front assessments that could make it harder for an FHA borrower to sell a home. Even with the law in place, however, it remains unclear how fast FHA can restore the fund, whose capital reserve ratio has dropped to 0.53%, significantly lower than the minimum 2% threshold mandated by law.

An independent actuary will complete the annual study and projections on the agency's MMI fund, including an updated capital reserve ratio that will be reported to Congress in November.

As part of its increased oversight of the agency, Congress asked the Government Accountability Office to examine the FHA's financial condition and come up with several recommendations.
One suggestion, vetted by Chairman Chris Dodd at the hearing, was requiring a time line for the FHA to restore the capital ratio to 2%.

Matthew Scire, director of financial markets and community investments at the GAO, said such a move was an opportunity for Congress to weigh in on "what balance there should be between financial soundness and its role supporting the mortgage market."

"It's important to consider what the role of FHA is in the next few years, in however many years makes sense to get back to that 2% ratio," Scire said.

Still, Dodd questioned whether a deadline would be the appropriate approach.

"I'm concerned a time line might tie the department's hands to do its job exactly at the time when we may want them to be aggressive," Dodd said.

While Scire agreed that an overly aggressive time line could be counterproductive, he said it would also serve as a way to hold FHA accountable to lay out what it thinks is a reasonable time frame for achieving a 2% capital ratio.

Stevens disagreed with the idea.

"A time line would be the wrong way of approaching FHA reform," Stevens said. "Putting a time line in place could force action that could have a broader adverse impact on the market."
The two factors that impact the levels of capital reserves, he said, are home prices and premiums paid on mortgage insurance.

While the FHA will provide a clearer projection of how quickly it will be able to reach its mandated goal when it releases its fourth-quarter results, Stevens estimated it would take three to four years to resume normal capital levels.

That was not enough to ease concerns by some Republicans. "How are you going to grow to at least have that 2%?" Shelby said.

The GAO echoed that skepticism.

"I don't think we have any way of knowing when FHA gets to 2%," Scire said.

"FHA is actually in the best position to do that estimate, and I would expect they would be able to say with the policy changes enacted … and assumptions about future economic activities. They should be able to tell us what their expectations are of reaching a 2% ratio."

Stevens said several factors would need to be taken into account before determining how quickly the agency could reach that goal. The biggest drivers, he said, would be the home price index, discount rates in the market, and recovery of defaulted loans.

"These are complex answers because obviously there are economic variables," Stevens said.
The GAO also criticized FHA for its reliance on a single economic forecast to determine the health of its fund, which in the past had not taken into account the variability of future home prices and interest rates.

The agency has since changed its approach. It now runs simulations of hundreds of different economic paths, which helps to provide for better estimates of the fund's economic value.

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