September 21, 2010 / 9:53 PM / 7 years ago

Stevens says FHA on path to financial health

WASHINGTON (Reuters) - Tighter lending standards and higher fees charged to borrowers have put the cash-strapped Federal Housing Administration on the path to financial health, the agency’s chief said on Tuesday.

“While there is still much work to be done, FHA is on a predicted path that will put the agency in a stronger position for the future,” David Stevens said in prepared testimony to the House of Representatives Financial Services Committee. Stevens is scheduled to appear Wednesday before the panel, which posted his remarks on its website on Tuesday.

Stevens said loans insured in fiscal year 2009 and 2010 are “much stronger than previous years.”

The FHA has capital reserves equal to just 0.53 percent of the value of the thousands of outstanding U.S. home mortgages it insures, well below the 2.0 percent required by law, according to an independent actuarial study released late last year. A new study is expected to be released this fall.

Congress earlier this year gave the FHA the authority to nearly triple the annual fees it charges borrowers. The FHA plans to begin more modest increases on the annual premium beginning next month.

Under the law, the FHA would have the authority to raise annual mortgage insurance premiums -- paid by the borrower over the life of the loan -- to a maximum 1.5 percent.

That is up from the current 0.55 percent maximum, although FHA Commissioner David Stevens has said the premium would rise gradually -- first to 0.85 percent or 0.9 percent, depending on the size of the borrower’s down payment.

The new fees are expected to raise about $3.6 billion annually for the FHA.

The FHA, which does not make loans directly, guarantees loans made to borrowers who meet certain restrictions.

As the mortgage crisis unfolded and private lenders began to pull back from lending, the FHA’s total volume rose from $54 billion in 2006 to $376 billion in 2009, according to Inside Mortgage Finance, an industry publication.

The FHA’s market share of total originations topped 20 percent in the three months through June, more than 10 times the share in 2006, when it was less than 2 percent.

Stevens told the panel the changes “are crafted to ensure that FHA steps back to facilitate the return of the private sector as soon as possible.”

While raising the annual premium, the FHA has said it also plans to lower a separate upfront premium from the current 2.25 percent to about 1 percent to offset the cost of the annual premium. The upfront premium is paid at the time a loan is issued.

Stevens has said it makes more sense for the fees to be paid throughout the life of the loan in the annual premium instead of forcing borrowers to pay them when the loan is made.

Reporting Corbett B. Daly; Editing by Diane Craft and Dan Grebler

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