Prepared Remarks of Secretary Shaun Donovan at the FHA Actuarial Conference Call
Thursday, November 13, 2012
Thank you all for joining. I apologize I couldn’t be with you in person this morning.
As many of you know, Hurricane Sandy pushed back a host of government business by a day or two -- including this actuarial announcement.
In fact, yesterday, I was in New York City with the President touring the damage inflicted by the hurricane -- and today, as the President’s redevelopment point person in the wake of the storm, I’m in New Jersey with Governor Christie.
Before Carol and Bob go through the specifics of this year’s annual actuarial report on FHA, I wanted to take a few moments to explain how the actuary came to the conclusions it did, why it changed from last year, and what it means--and what it doesn’t mean--for FHA and the housing market going forward.
Obviously, this report arrives at important moment for our housing market. As 2012 draws to a close, Americans are starting to feel a sense of hope for the first time in half a decade -- with housing construction growing faster any time since 2008, the strongest year of home sales since the crisis began, and rising home values lifting 1.3 million families above water in the first half of the year.
That we are at this point only a few years after the worst housing crisis in 80 years is because of the FHA. With its dual mission of providing access to homeownership for underserved populations and supporting the housing market during tough times, there is little doubt that FHA helped prevent a much deeper crisis.
That progress, however, has not been without stress.
According to the independent actuary’s annual report, this fiscal year the capital reserve ratio of FHA’s MMI Fund fell below zero -- to negative 1.44 percent, with fully $70 billion in claims attributable to the 2007-to-2009 books of business alone.
Before I explain the three factors driving the change in FHA’s position compared to last year, I want to be clear that this report does not mean that FHA will have to use its authority to draw from the Treasury to cover estimated losses.
First, any draw--which all federal loan programs have access to--would be determined not by the economic assumptions of this review but those used in the President’s budget to be released in February -- which will account for the actuary’s findings, and incorporate other factors as well.
Second, the actuary’s analysis did not take into consideration new economic value generated after FY2012, estimated by the actuary at $11 billion through the end of FY2013.
Third, the accounting of FHA’s books that will determine whether a draw would actually be needed is done near the conclusion of the fiscal year -- around September 30. And in the interim, FHA will launch a series of additional actions designed to add billions to the fund in this fiscal year alone -- which I will come to in a moment.
So, let me briefly touch on the three factors driving the decline in the capital reserve ratio compared to last year.
First, the house price appreciation estimates used by the independent actuary for this review were significantly lower than those used last year. That may seem counterintuitive given the progress we’ve seen, but it’s partly because the actual turnaround in the market I described a moment ago occurred later than was projected in last year’s forecast.
Further, the house price appreciation estimates used by the actuary this year do not include improvements since June and were depressed by a high level of refinance activity that muted the appreciation seen in national purchase indices.
Second, the continued decline in interest rates, while good for the overall economy, costs the FHA revenue as its borrowers pay off their mortgages to refinance into lower rates. Again, this is clearly a positive, but it impacts the actuary’s estimate of the value of the Fund.
In addition, the actuary predicts that borrowers with higher interest rates who are unable to refinance will default at higher than normal rates, increasing losses from foreclosures for FHA.
Third, based on recommendations made by the Government Accountability Office, HUD’s Inspector General and others, , the actuary changed the way it reflects losses from defaulted loans and reverse mortgages in the economic value of the MMI Fund.
While this report does not mean that FHA will have to draw from the Treasury, we take its findings seriously.
That is why today we are announcing a series of changes to strengthen the Fund. These measures will directly address the source of the problem--losses stemming from legacy books of business in the 2007-09 period--and reverse a policy from 2001 that has led to a significant shortfall in premiums collected for loans held for more than a few years.
First, with $70 billion in FHA claims attributable to loans insured from 2007-to-2009, we will take additional steps to maximize recoveries as borrowers go into foreclosure.
Building on the success of our Distressed Asset Stabilization Program, the FHA is committing to sell at least 10,000 defaulted mortgages headed for foreclosure per quarter over the next year -- providing the opportunity for the purchaser and borrower to avoid a costly foreclosure while reducing costs to the Fund.
We are also targeting deeper levels of payment relief for struggling borrowers by revising our loss mitigation program to more effectively assist families trying to keep their homes and meet their obligations.
Additionally, we are expanding initiatives that decrease losses associated with the sale of foreclosed properties and increasing the use of short-sales to provide more families the opportunity to avoid foreclosure.
The idea behind these efforts is the same: foreclosures are expensive. By reducing the likelihood that a family will be foreclosed upon in the first place, we reduce costs for families and FHA alike.
We’re also taking additional measures on new loans. In particular, we will reverse a policy change made over a decade ago that eliminated the requirement for borrowers to pay premiums after their loans reached a certain percentage of their original home value.
This change has left the FHA left without premiums to cover losses on loans held beyond the period for which we are collecting premiums.
Reversing this policy is expected to improve the value of the Fund by $2.6 billion in this fiscal year alone.
In addition, we will raise our annual mortgage insurance premiums a modest 10 basis points -- which we estimate will increase costs to new borrowers about $13 per month.
This increase will add an estimated $1 billion to the Fund and ensure that FHA does not take on additional market share in light of recent increases by the GSEs, while at the same time being modest enough that it doesn’t threaten our emerging housing recovery.
But while we are continuing to take aggressive measures to protect the Fund using our existing authority, we need help from Congress to take all of the steps needed.
So, today we’re calling on Congress to move on a set of proposals that are designed to place FHA in a stronger fiscal position over the next twelve months.
These steps include new asset management authority, additional enforcement authority, and greater administrative flexibility in managing the reverse mortgage program -- so we can continue to improve this product, ensuring that it remains available to seniors, and minimizing risk to the Fund.
Several of these proposals have already been passed by the House -- and we look forward to continuing to work with both chambers to enact final legislation to provide FHA with the tools it needs to build on the reforms already in place.
Finally, in conjunction with the President’s budget and plans for long term housing finance reform, we are developing additional policy measures which will also help improve the FHA’s capital reserves.
You’re about to hear a much more detailed presentation from Carol and Bob about the report and these changes.
But coupled with the $11 billion in additional value from new business the actuary estimates FHA will do in FY 2013, this set of measures will reduce the likelihood that FHA would need to tap into Treasury assistance next September.
This balanced approach to strengthening FHA and providing much needed stability during the recovery of the housing market, sets the stage for a stronger FHA and an improved economy, while continuing to take steps to reduce government’s footprint in the marketplace.
Given the progress we’ve seen in the housing market--and the FHA’s central role in that progress--it’s clear FHA has done its job. Our job now is to ensure FHA can continue be a source of opportunity and access to homeownership for future generations.
And with the steps we are announcing today, I’m confident it can be -- and will. And with that, let me pass this off to Carol and Bob. Thank you all.