Donovan Questioned by Senate Committee on FHA’s Finances

In a ""testimony"":http://banking.senate.gov/public/index.cfm?FuseAction=Hearings.Hearing&Hearing_ID=b0c44d6f-687e-4e1d-8623-e50cdbe4ac8f before the ""Senate Banking Committee"":http://www.banking.senate.gov/public/index.cfm?FuseAction=Home.Home on Thursday, ""HUD"":http://portal.hud.gov/hudportal/HUD Secretary ""Shaun Donovan"":http://portal.hud.gov/hudportal/HUD?src=/about/principal_staff/secretary_donovan defended the Federal Housing Administration's (FHA) recent role in the housing market and the steps the agency has taken to avoid a possible bailout.

[IMAGE] In an ""annual report"":http://dsnews.comarticles/fha-mmi-fund-in-negative-agency-says-it-wont-need-immediate-treasury-draw-2012-11-16 issued to Congress in mid-November, HUD revealed the capital reserve ratio of FHA's Mutual Mortgage Insurance (MMI) Fund had fallen to -1.44 percent (representing -$16.3 billion) based on data from an independent actuary.

The report has many analysts, policymakers, and trade groups speculating about the likelihood of an imminent Treasury draw to keep the FHA alive. While Donovan acknowledged that a bailout is a possibility, he said the agency won't have a clearer picture until the president's budget is released.

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The answer provided little comfort for the committee, which pointed out that the assumed ""worst case scenario"" interest rates used in the FHA's actuarial report are actually higher than current rates. Interest rates have had an estimated negative impact of roughly $10 billion.

In response, Donovan argued that other factors--such as home prices, which have improved beyond the report's projections--are mitigating the downsizing effect of low rates. He also noted that the actuarial report assumes no new business will be added to the FHA's books and that the agency will take no steps to improve its financial position.

In its report to Congress, the FHA outlined several steps it intends to take, including raising premiums slightly, removing cancellation on premiums for new loans going forward, and revising its loss mitigation strategies.

""We think with a set of changes that we are already taking ... those alone could add about $3 billion to the fund over the next couple years,"" Donovan estimated.

Where HUD needs help, he said, is actually the area of legislation. He argued that the agency needs enhanced enforcement authority to recover money lost.

The FHA is also hurting from excessively high loan limits, an obstacle he feels HUD is powerless to overcome on its own.

""We support our loan limits coming down, and they were supposed to expire last year. Congress made the decision to lower the GSEs' loan limits but kept the FHA's higher level,"" Donovan said. He also remarked that, given Congress' decision to extend the higher limits, he felt HUD could not act on its own to bring them down.