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» VISIT US ONLINE @ DSNEWS.COM GAO CATEGORIZES FHA AS 'HIGH RISK' Start your day with a professional pick-me-up. Start your day with the most current and critical news on the mortgage default servicing industry from DSNews.com. Sign up for our e-mail newsletter and get the top stories delivered direct to your inbox every day. Register to receive your Daily Dose at DSNews.com In response to the Federal Housing Administration's (FHA) capital woes of the last several years, the Government Accountability Office (GAO) says it now considers the agency to be a "high risk" program "due to [its] greater vulnerability to fraud, waste, abuse, and mismanagement." In a 2013 update to its High-Risk Series, GAO noted FHA's single-family loan insurance portfolio has grown from about $300 billion in 2007 to $1.1 trillion in 2012 as the agency edged out the private sector. The federal watchdog agency also pointed out that FHA's capital reserves have fallen below the required threshold of 2 percent of its portfolio because of increases in defaults on the loans it has insured. As a result, GAO said it is modifying the high-risk area of the government's role in housing finance to include FHA. The agency stressed "the need for actions beyond those already taken to help restore FHA's financial soundness and define its future role." Both HUD and FHA have had a tumultuous time in the months since last November, when it was revealed that the capital reserve ratio on FHA's Mutual Mortgage Insurance Fund had fallen to -1.44 percent. The fund has a negative economic value of $16.3 billion. In response, FHA Commissioner Carol Galante rolled out a series of reforms designed to strengthen the agency's financial situation. However, her planned efforts did little to placate some members of the House Financial Services Committee, which held two hearings in February to review FHA's financial condition and its role in housing finance. In a statement, Rep. Jeb Hensarling (R-Texas), chairman of the House Financial Services Committee, said the high-risk classification "reinforces everything our committee has been saying about the FHA for some time now—it is a high risk to taxpayers, it is a high risk to the mortgage insurance market, and it represents a high risk to our economy." The Senate Committee on Banking, Housing and Urban Affairs has also hosted a series of hearings on FHA. At a hearing in late February following GAO's high-risk announcement, Phillip Swagel, professor of international economic policy at the University of Maryland School of Public Policy and former assistant Treasury secretary for economic policy, testified that FHA "displaces private sector activity, while providing backing for some houses worth more than $700,000—a level at odds with its mission." Swagel suggested FHA reduce its loan limits to shrink its market share and focus on those who need assistance the most. He also mentioned the importance of reforming the GSEs in concert with FHA. In a scenario in which the GSEs raise their standards and FHA does not, borrowers will flock to the FHA, increasing risk to the agency and taxpayers, according to Swagel. Just as Swagel and other panelists questioned the appropriateness of FHA's presence in the high-end home market, Gary Thomas, president of the National Association of Realtors, pointed out that some feel FHA has overstepped its boundaries in lending to an increasing number of borrowers with high credit scores, which does not fit into FHA's mission of serving underserved markets. However, Thomas countered, "If they are denied a loan in the private marketplace, where else can they turn? That is exactly FHA's role —to lend to the underserved." Thomas added, "As hard as it is to believe, borrowers with credit scores below 760 may be underserved by the private market." Thomas defended FHA's recent, expanded role in the market, which he said was necessary, but the general sentiment throughout the hearing was that FHA's current role in the market is not necessary in the long-run. "FHA has been and remains a valuable part of the housing finance system," said Teresa Bryce Bazemore, president at Radian Guaranty. "In the past few years, however, FHA has overtaken the mortgage insurance market due to increased loan limits, inadequately-priced FHA premiums, and permissive FHA underwriting." A couple of panelists, including Sarah Rosen Wartell, president of the Urban Institute, also expressed concern over FHA's lack of ability to change policies quickly to adapt to the market. Wartell said some of FHA's inflated costs in recent years were unavoidable due to declines in the market. However, "some of these costs might have been avoided if FHA had more analytic capacity and additional tools and authorities to act nimbly to manage, price, and mitigate risk," she said. 35

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