Last month, the leaders of the Senate Banking Committee released a draft bill that is designed to bolster the finances of the Federal Housing Administration (FHA), which has continued to face mounting losses from mortgage defaults. The Federal Housing Administration Solvency Act of 2013 was introduced by Senator Tim Johnson (D-SD), Chairman of the Senate Banking Committee, and Senator Mike Crapo (R-ID), the Senate Banking Committee’s ranking Republican.
The bi-partisan bill is now heading to the Senate floor after receiving official approval from the Committee on Banking, Housing, and Urban Affairs, which voted 21-1 in favor of the new legislation. If approved by the Senate, the new bill will improve the FHA’s ailing financial health by strengthening its underwriting standards, reforming its reverse mortgage program, and enhancing its lender accountability measures.
The Federal Housing Administration Solvency Act of 2013 would increase the required minimum annual mortgage insurance premiums to improve the long-term solvency of the FHA. The premium levels would then be re-evaluated each year to help ensure that they adequately cover potential risk and maintain the capital reserve ratio.
The new bill would also create an advanced warning system by raising the minimum for the Mutual Mortgage Insurance Fund’s capital reverse ratio to 3 percent. If the capital ratio doesn’t meet certain targets as it builds to the new minimum ratio, the bill would require the Department of Housing and Urban Development (HUD) to take immediate action to address the shortfall.
The bill would also require HUD to evaluate and revise underwriting standards whenever necessary to ensure that borrowers only get loans that they can afford, and would require the Department to consolidate guidelines for lenders and servicers regarding the requirements, policies, processes, and procedures that apply to loans insured by the FHA as well.
Additionally, the bill would give HUD new tools to hold lenders accountable for issuing fraudulent or inappropriate mortgages, and would also grant more regulatory power to the Department so it can help stabilize the FHA’s reverse mortgage program.
The FHA, which faces a projected shortfall of $16.3 billion due in part to defaults on mortgages it guaranteed for 2007 to 2009, has already taken several recommended steps to help mitigate its losses. However, Senator Johnson and Senator Crapo’s new bill would help provide more flexibility to improve the FHA’s balance sheet and protect taxpayers from having to bailout another government agency.