Castro grilled over lowering mortgage insurance premiums

The nation’s top housing official on Wednesday tried to reassure concerned House Republicans that his latest policy moves will bolster the long-term financial health of the Federal Housing Administration (FHA).

Republicans grilled Housing and Urban Development Department Secretary Julian Castro during a House hearing about his recent decision to lower mortgage insurance premiums despite the FHA falling short of its capital reserve requirement.

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House Financial Services Committee Chairman Jeb Hensarling (R-Texas) and several other GOP members of the panel told Castro that the agency is breaking the law and needs to do everything possible to reach its 2 percent requirement.

"The FHA continues to violate federal law by keeping a woefully insufficient capital reserve and right after receiving its first-ever taxpayer bailout," Hensarling said.

"This cannot be allowed to stand."

Rep. Sean Duffy (R-Wis.) said "you're in violation the law and it really rubs us the wrong way and we don’t like it."

But Castro argued that the FHA is delicately balancing its mission of meeting the needs of U.S. homeowners of more modest incomes while trying, at the same time, to reach the statutory 2 percent capital reserve requirement.

The last time FHA was at the required level was six years ago. 

Panel Republicans argued that the Obama administration's move to lower mortgage insurance premiums to 0.85 percent from 1.35 percent could hamper the FHA's ability to squirrel away the needed reserve funds.

"It seems you should be looking more toward getting the reserves up," Rep. Ed Royce (R-Calif.) told Castro.

Castro reiterated that the premiums had been raised five times, or by 145 percent, since 2010 and, even with this reduction, they are still 50 percent higher than pre-recession levels.

The Mutual Mortgage Insurance Fund holds 0.41 of the required 2 percent in capital reserves. 

Republicans cite the FHA's need for a $1.7 billion draw from the Treasury in 2013 to shore up its reserves fund as reason to be concerned about the agency's failure to move faster toward the required 2 percent level. 

But Castro argued that the FHA's tightening up of underwriting standards and requiring a higher down payment from borrowers with lower credit scores has made it possible to reduce the premiums without significantly slowing the goal of reaching the 2 percent level within two years.

Plus, an improving housing market and two record years for the agency has put it back on firmer financial footing.

"We've seen incredible progress toward the 2 percent better and the news today is better than there has been in the past," he told the panel.

And, even though he said he couldn't fully predict the future, Castro said he doesn't expect the need for another Treasury bailout any time soon.

But several lawmakers said that FHA officials have failed to make good on similar promises that the fund was well on its way to reaching the requirement. 

“This committee has been told that once, twice, three times, and it hasn’t proven true,” Hensarling said.

Rep. Mick Mulvaney (R-S.C.) asked by how much it would change the expected target date to reach the 2 percent. 

Castro said it would be less than a year and probably only a few months.

Feeding that optimism that the FHA will reach its reserves goal is that the agency had its two most profitable years in 2013 and 2014, which boosted the value of the reserve fund by $21 billion. 

Overall, the FHA has $46 billion on hand and the reserves fund has a net worth of $4.8 billion.  

On top of that, the reserve fund's value is expected to grow by at least $7 billion annually over the next several years, putting it well within the range of reaching the 2 percent threshold by 2016, Castro said.

"With FHA’s most recent independent actuarial analysis showing ongoing improvement, and the overall housing market’s continued recovery, it is clear FHA has turned the page on the recession," he said. 

Overall, the premium reduction would save homeowners an estimated $900 a year and draw at least 250,000 more potential borrowers into the market.

The move, announced by Castro early last month, has gotten broad support from mortgage and real estate groups.

National Association of Realtors President Chris Polychron said Wednesday that the new policy "will help more first-time borrowers achieve homeownership without increasing the risk of mortgage defaults or of another taxpayer bailout."