Report Says FHA in Best Financial Condition Ever as Housing Groups and Mayors Call on Congress to Oppose FHA Privatization Proposal; Minority Homeownership Could Be Jeopardized by FHA Privatization
March 7, 2000
WASHINGTON, An independent report issued today by the accounting firm of Deloitte & Touche says the Federal Housing Administration's Mutual Mortgage Insurance Fund is in its strongest financial condition since it was created in 1934, with a record economic value of $16.6 billion.
The report prompted the Mortgage Bankers Association of America, the National Association of Home Builders, the National Association of Realtors and the U.S. Conference of Mayors to issue a letter asking Congress to oppose a Congressional proposal to privatize FHA and its sister agency Ginnie Mae, which are now part of the Department of Housing and Urban Development.
The letter says: "Under the leadership of HUD Secretary Andrew Cuomo, FHA and Ginnie Mae are the strongest they have ever been ... Democratic and Republican Administrations alike have proven that under the guidance and control of the HUD Secretary, FHA and Ginnie Mae can play a vital role in helping more Americans become home owners. We urge you to pledge your support for keeping FHA and Ginnie Mae within HUD, and to oppose any Congressional proposal to privatize these agencies."
Congressman Rick Lazio, Chairman of the House Banking Committee's Subcommittee on Housing and Community Opportunity, has proposed merging FHA and Ginnie Mae and spinning them off from HUD as a separate corporation.
HUD Deputy Secretary Saul Ramirez warned that a privatized FHA and Ginnie Mae would be less able to promote homeownership by minorities and low- and moderate-income families because the privatized corporation would be focused on increasing profits.
"FHA has succeeded in unlocking the door to homeownership for 30 million American families, many of them minorities and people of modest means," Ramirez said. "We need to be opening that door even wider today, not slamming it shut on the dreams of hard-working families in order to maximize profits for a new corporation."
FHA Commissioner/Assistant Secretary for Housing William Apgar said: "The study issued today is the equivalent of a straight-A report card for FHA -- hardly an evaluation that shows FHA should drop out of HUD. In view of the success of FHA and its partner Ginnie Mae, it's mindboggling to me that members of Congress, including Congressman Lazio, continue to float legislative proposals that would privatize or spin-off FHA or Ginnie Mae." Ramirez said management reforms launched by Cuomo are responsible for the improved performance by the FHA insurance fund.
The Deloitte & Touche study says the record $16.6 billion economic value of the FHA's insurance fund is an increase of $5.3 billion over 1998. The study says this improvement will withstand potential economic downturns. The economic value of the fund is defined as the sum of existing capital plus the value of current insurance in force.
The report also states that FHA's capital adequacy ratio is 3.66 percent -- far in excess of the Congressionally mandated goal of 2 percent. The capital adequacy ratio is the economic value of the fund divided by the total insurance in force.
In addition, Deloitte & Touche found that FHA has made a remarkable turnaround from just ten years ago. The FHA insurance fund had an economic value of negative $2.7 billion in 1990. FHA suffered years of mismanagement in the 1980s, and by 1990 it had projected losses from claims on mortgage insurance far in excess of projected revenue. Absent radical restructuring, a costly federal bailout seemed inevitable.
Mortgage Bankers Association of America President Christopher J. Sumner congratulated HUD and FHA for the "terrifically positive" Deloitte & Touche actuarial report. Sumner said the report is, "a great statement about how a government program can serve its constituents and deliver those services in a fiscally prudent manner."
Tom Downs, Executive Vice President and CEO of the National Association of Home Builders, said of the report: "This is very good news. A strong financially viable FHA Mutual Mortgage Insurance Fund is a crucial element in making homeownership opportunities available to the broadest possible range of buyers."
Apgar added: "This new study shows FHA has succeeded by bringing in more revenue for the federal government and by helping more Americans build better lives for their families and brighter futures for their communities. Very few government programs can say they accomplish so much without costing taxpayers a penny." FHA's revenues from insurance fees exceeded expenses in 1999, enabling the agency to return about $1.5 billion to the U.S. Treasury.
Ramirez pointed out that an increasing number of FHA-insured loans are being made to first-time homebuyers and to minority families. He noted that:
- The percentage of people getting FHA-insured mortgages who were first-time homebuyers skyrocketed from 64.4 percent in 1992 to 80.8 percent in 1999.
- The percentage of people getting FHA-insured mortgages who were minorities jumped from 21.7 percent in 1992 to 37.7 percent in 1999. In 1999, FHA provided financing for an all-time record 170,193 African-American families -- a more than three-fold increase over the number served in 1992. The record 222,822 loans made to Hispanic borrowers in 1999 represents a four-fold increase over 1992 levels.
Ramirez said FHA has played an important role in HUD's successful efforts to increase homeownership in America. The percentage of households owning their homes -- known as the homeownership rate -- has risen steadily since President Clinton took office, jumping from 64 percent in 1993, to 66.3 percent in 1998, and setting a new record of 66.8 percent in 1999.
FHA is working in coordination with other offices within HUD to reduce the homeownership gap dividing whites and minorities, Ramirez said. While the homeownership rate stood at 73.2 percent for white households in 1999, it stood at only 46.7 percent for black households, 45.5 percent for Hispanic households, and 54.1 percent for other minority households last year.
FHA does not make mortgage loans directly, but rather insures loans made by private lenders to homebuyers. Last year FHA insured a record 1.3 million mortgages worth $125 billion. Because FHA mortgage insurance protects lenders from losses, it has enabled 30 million American families who would otherwise be locked out of the mortgage market and homeownership to qualify for mortgages.
Ginnie Mae is a wholly-owned government corporation within HUD that supports federal housing initiatives by guaranteeing securities issued by private lenders that are backed by pools of residential mortgages insured by FHA, the Department of Veterans Affairs and the Rural Housing Service. FHA now insures about 6.7 million mortgages. When homeowners fail to make payments on mortgages insured by FHA, the agency first tries to help them stay in their homes through foreclosure avoidance. If this is not successful, the lender forecloses on a home and conveys it to FHA in exchange for FHA payment of the outstanding mortgage balance. FHA then puts the home up for sale.
FHA-insured loans also benefit homebuyers in these ways:
- FHA downpayments of 3 percent are lower than the minimum that many lenders require for non-FHA mortgages. Higher downpayments are a major roadblock to homeownership.
- FHA's requirement for homebuyer credit ratings are more flexible than those set by many lenders for non-FHA borrowers.
- FHA permits homebuyers to use gifts from family members and non-profit groups to make their entire downpayment, while conventional loans generally require homebuyers to come up with a portion of the downpayment from their own funds.
- FHA permits a borrower to carry more debt than a private mortgage insurer typically allows.
SOURCE U.S. Department of Housing and Urban Development