The Future of the FHA's Capital Reserves
"Good morning ladies and gentlemen.
I would like to thank the Ranking Member and the other Members of the Subcommittee on Housing and Community Opportunity for joining me today for this hearing on "The Future of the Federal Housing Administration's Capital Reserves: Assumptions, Predictions and Implications for Homebuyers."
Before I begin I would like to note that without objection, Representative Scott Garrett will be considered a member of the Subcommittee for the duration of this hearing.
The Federal Housing Administration (FHA) was created during our last major housing crisis, the Great Depression. At that time, 50 percent of mortgages were in default or foreclosure.
Today, we face a housing crisis that is perhaps less severe, but still considerably grave for millions of American families facing foreclosure or trying to buy a home. Markets have contracted, and homebuyers have limited options when trying to get a mortgage.
As a result, FHA has stepped into the void left by the private market. Today, FHA is increasingly the only option for most potential American homebuyers -- those who don't have 20 percent for a downpayment. While FHA market share was around 3 percent of lending activity dollar volume as of 2006, it has increased to nearly 30 percent of all mortgages originated today.
With this drastic increase in market share, we must continue to maintain the integrity of FHA mortgage insurance programs. I have long been committed to ensuring that FHA remains an available, affordable and safe option for all families. I wrote legislation ensuring that FHA could provide an alternative to subprime lenders with The Expanding American Homeownership Act of 2007, which was ultimately included in the Housing and Economic Recovery Act of 2008. Also, in May, the President signed The Helping Family Save Their Homes Act of 2009, which included a provision I authored to ensure that FHA programs remain out of bounds for the worst predatory lenders who created our mortgage crisis.
It is a myth that FHA is the new subprime and has adopted lower underwriting standards and the other worst abuses of the subprime market. In fact, just the opposite is true. A recent Federal Reserve report indicates that over 60 percent of the increase in FHA purchase activity between 2007 and 2008 was to borrowers with prime-quality FICO scores. Additionally, the percentage of loans in FHA's portfolio with loan-to-value ratios above 95 percent has fallen from 72 percent in 2007 to 67 percent in 2008. And unlike the subprime market, all of FHA's mortgages require full documentation and verification of the borrower's income and assets.
Let's be clear. Without FHA, there would be no mortgage market right now. Private mortgage insurance companies have raised prices and tightened standards to a level that leaves out many potential homebuyers. With 30 percent of the overall market, and nearly 80 percent of the first-time homebuyer market, FHA is a crucial tool for ensuring our housing recovery.
I am eager to hear from Commissioner Stevens about the steps he is taking to ensure the long-term future of the FHA. I understand the concerns that have been raised regarding reports that FHA's capital reserve ratio will fall below the 2 percent threshold mandated by Congress. Though we do not yet know the exact level of the capital reserve ratio for fiscal year 2009, we know that the economic downturn has affected FHA.
I am also interested to hear our witnesses comment on how overall economic conditions will continue to affect FHA and how industry groups are responding to FHA's increased market share. I look forward to hearing the testimony of today's witnesses.
I would now like to recognize our Subcommittee's Ranking Member to make an opening statement."
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