Government backing for the Federal Housing Administration (FHA) gives it competitive advantages over private sector mortgage insurers, driving them out of the marketplace and leaving homebuyers with fewer choices, witnesses told the Financial Services Subcommittee on Housing and Insurance today.
These advantages are one reason why the FHA dominates the mortgage insurance market. The FHA insured more than 57 percent of all insured mortgages in 2012, dwarfing the 18 percent share held by private mortgage insurers.
The FHA’s single-family insurance fund insures more than $1 trillion worth of home mortgages but has a negative economic value of $16.3 billion, according to an actuarial report released last November.
“Because it is a government-backed entity, the taxpayers are, in fact, on the hook for over a trillion dollars worth of mortgages in this country,” said Subcommittee Chairman Randy Neugebauer (R-TX). “You have an over trillion dollar entity that is backed by the American taxpayers that has a negative net worth. Now any other company like that would be in bankruptcy or receivership.”
Wednesday’s hearing was the third in a series the Financial Services Committee is holding this year to examine the nation’s housing finance system. Committee Chairman Jeb Hensarling (R-TX) announced in January that the hearings will focus specifically on the financially troubled FHA and the need to create a sustainable and competitive housing finance system.
In the past few years, “FHA has dominated the mortgage insurance market due to housing policies and practices that provide competitive advantages to FHA while crowding out private capital,” Teresa Bryce Bazemore, president of private mortgage insurance company Radian Guaranty, Inc., said in testimony to the subcommittee. These policies and practices “steer borrowers to FHA instead of bringing more private sector capital into the housing market.”
Bazemore went on to say that “FHA reform should be undertaken with a view toward reducing the role of the federal government in the mortgage market, increasing the role of private sector capital, and preventing future taxpayer bailouts. This necessarily includes scaling back FHA to its traditional role of supporting underserved borrowers and discontinuing housing policies and practices that provide a competitive advantage” over private mortgage insurance.
In his testimony to the subcommittee former Illinois Insurance Commissioner Nat Shapo argued that the FHA operates under “far less stringent standards” than private mortgage insurers. Shapo said the FHA is not subject to state insurance regulatory oversight but competes with private insurers that are.
“It is operating in fundamental disregard for the basic principles of insurance solvency regulation, despite the clear suggestion to the public…that it follows such tenets,” Shapo told the subcommittee.
Stephen Stelmach of FBR Capital Markets and Co. told the subcommittee that “persistent regulatory uncertainty” has made investors hesitant to provide the mortgage insurance industry with needed capital.
“In total, the mortgage insurance industry has attracted nearly $3 billion in new capital in the last 12 months,” Stelmach said. He went on to note, however, this amount is “a far cry from the roughly $20 billion of capital” invested in the industry a few years ago.
The FHA not only competes unfairly with private insurers, it is also a risk to taxpayers, subcommittee members said.
An independent actuarial review released last November revealed the FHA’s single-family insurance fund is on the verge of requiring its first-ever taxpayer-funded bailout. That review showed the fund has a negative economic value of $16.3 billion.
In its budget proposal released last year, the Obama Administration estimated the FHA would need a bailout of $688 million. The FHA was able to avoid that bailout when it received $1 billion from last year’s mortgage servicing settlement to plug the projected shortfall.
However, many industry analysts believe that the Obama Administration’s fiscal year 2014 budget proposal — which the President failed to submit by the statutory deadline — will include another multi-million dollar draw from Treasury to bail out the FHA.