UPDATE:US Government Internal Watchdog:FHA Need For Funding 'Critical'
January 09 2009 - 11:43AM
Dow Jones News
A U.S. government internal watchdog warned Friday that the
Federal Housing Administration may not be able to cope with a surge
in its business, citing the agency's largely manual lender approval
process and problems with internal controls and risk
management.
Department of Housing and Urban Development Assistant Inspector
General James A. Heist told a U.S. House panel that the FHA had a
"critical need" for more funding to upgrade computer systems,
increase staffing levels and training and strengthen its oversight
of lenders and appraisers.
"FHA may not be able to handle its expanded workload or new
programs that require the agency to take on riskier loans then it
historically had in its portfolio," Heist testified before the
House Financial Services Committee.
The committee meeting was called in the wake of news reports
alleging lax oversight by the agency of mortgage lenders. "We need
to know what is behind these allegations, whether they are
accurate," Financial Services Committee Chairman Barney Frank,
D-Mass., said in his opening remarks.
The allegations were firmly refuted in testimony from Phillip
Murray, an FHA official and HUD's deputy assistant secretary for
single family housing programs, who defended the agency's ability
to oversee its lenders and catch fraud.
"These stories misrepresent a well-respected federal program
that has provided untold benefits to millions of Americans," Murray
said.
However, Murray agreed that FHA urgently needed more funds. "We
have real needs to upgrade our technology, hire more staff,
purchase more fraud detection tools," he said.
After falling into near-irrelevancy during the subprime lending
heyday of 2004-2006, the FHA has roared back. A Depression-era
agency, the FHA was created to help low-income and first-time home
buyers by insuring mortgage lenders against default on FHA
loans.
Today, with the subprime collapse and the subsequent
across-the-board tightening in credit, it is a vital cog in the
U.S. mortgage market.
A hike in the size of mortgages the agency can insure has vastly
expanded the pool of borrowers eligible for FHA loans. Economic
stimulus legislation last year raised the limit to nearly $730,000
from about $362,000. As of Jan. 1, the limit was permanently lifted
to $625,500.
The agency has seen its loan volume roughly quadruple in the
last year, yet its staffing levels have remained nearly flat. The
situation has spawned concerns that the agency will become a victim
of mortgage fraud. Some fear that it will be hit by a wave of
defaults and require a taxpayer-funded bailout.
With the cratering housing market, the FHA's insurance fund took
an estimated $8.7 billion hit in fiscal 2008, according to an
actuarial review. Still, its capital ratio remains above the 2%
minimum required by law at around 3%. The fund still has nearly $13
billion in capital to absorb losses.
In October 2008, FHA market share, including both new mortgages
and refinancings, jumped to 76% from 21% the year before, according
to Heist. The agency's share of new mortgages had climbed to 23%
from 6.4% over the same period.
Frank said that he would introduce draft legislation Friday that
would increase the FHA's role in helping borrowers avoid
foreclosure. Last year, Frank spearheaded the creation of a
program, Hope for Homeowners, to help as many as 400,000 strapped
borrowers refinance into FHA loans. So far, the program has
attracted few participants due to constraints on borrowers and
lenders.
Frank said he would make fixes to the program in legislation
setting out conditions for the release of the remaining $350
billion in financial rescue funds. He asked Murray to provide the
committee with information on how much money the FHA needs to staff
up. "We want to make you more of a player," he said.
Heist warned that the spike in demand for FHA loans could have
"collateral implications" for the mortgage-backed securities issued
by the Government National Mortgage Association, known as Ginnie
Mae. A wholly-owned U.S. government corporation, Ginnie Mae
guarantees for investors the timely payment of principal and
interest payment of securities backed by FHA and other loans
guaranteed by the U.S. government.
With the explosion in FHA loan volume, Ginnie Mae has also seen
its business boom. In October, Ginnie Mae's share of the
mortgage-backed securities market swelled to 39%, surpassing both
Fannie Mae (FNM) and Freddie Mac (FRE).
-By Jessica Holzer, Dow Jones Newswires; 202-862-9228;
jessica.holzer@dowjones.com
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