Donovan: FHA Working on Alternate Premium Structure for Streamlines

In broad ranging testimony before the SenaternCommittee on Banking,rnHousing, and Urban Affairs on Tuesday, Housing and UrbanrnDevelopment (HUD) Secretary Shaun Donovan touched on the substantial risksrnconfronting FHA and its Mutual Mortgage Insurance (MMI) Fund in the comingrnyears and the potential for returning the Fund to solvency by 2015.</p

The MMI Fund, Donovanrnsaid, has seen high numbers of claims from originations prior to 2009 and thisrnhas severely impacted the health of the fund. rnThrough systematic tightening of risk controls, increased premiums, andrnexpanded use of loss mitigation, the situation has turned around that the outlookrnfor FHA and the Fund are much brighter than they were in 2009.</p

But further steps tornstrengthen MMI are still necessary and Donovan said that an increase of bothrnupfront and annual premiums were announced on Monday which will increasernpremium receipts to FHA by $1 billion in FY 2012 and 2013 beyond those includedrnin the President’s budget.  But problemsrnremain.  MMI has two components, thernFinancing Account which holds enough money to accommodate expected 30 yearrnlosses on FHA’s insured portfolio as of the end of the current fiscal year; andrnthe Capital Reserve Account which Congress mandates must hold an amount equalrnto 2 percent of the insurance in force. Since 2009 Capital Reserves have beenrnbelow that level.</p

The President’s Budgetrnestimate of the status of the capital reserve at the end of the current fiscalrnyear did not include the revenue from the increased premiums but also thernproceeds from the recently announced settlements with FHA-approved lenders. ThernBudget does estimate that FHA will add an additional $8 billion to the ReservernAccount in 2013 and will return to the congressionally mandated capital reservernratio of 2 percent by 2015.</p

Donovan devoted most ofrnhis testimony to updating the Senators about the housing initiatives proposedrnby President Obama in his State of the Union and subsequent speeches.  Donovan said that one of the most importantrnways the administration proposes to help keep people in their homes is throughrnbroad-based refinancing programs and pointed to the FHA Streamlined RefinancernProgram.   This program allows borrowers with FHA insuredrnloans who are current on their existing mortgages to refinance into a new FHArninsured loans at current low interest rates without requiring additionalrnunderwriting.  </p

Donavan said because FHA seesrna potential for more widespread use of this product, it will make changes tornthe way in which streamline refinance loans are displayed in the Neighborhood Watch EarlyrnWarning system so that lenders are not on the hook for loans they did notrnoriginate and thus will be more willing to provide the refinancing.</p

FHA is also taking stepsrnto make these streamline loans more widely available by adjusting the premiumrnstructure for all Streamline Refinance transactions that are refinancing FHArnloans endorsed on or before May 31, 2009. rnThese changes will ensure that borrowers benefit from a net reduction inrntheir overall mortgage payment while still ensuring FHA has the resources tornpay any necessary claims. </p

Industry insiders saidrnthat it was unclear what Donovan meant by this statement, but that there willrnbe an FHA meeting with servicers on Wednesday and a Mortgagee Letter scheduledrnfor release on Thursday so they expect more information will be forthcoming.

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