February 11, 2015 / 5:46 PM / 5 years ago

U.S. housing secretary defends reduction in mortgage insurance fees

WASHINGTON (Reuters) - The Federal Housing Administration is not putting its finances at risk by reducing insurance fees it charges lower-income home buyers, the top U.S. housing official said on Wednesday.

Housing and Urban Development (HUD) Secretary Julian Castro testifies before a House Financial Services Committee hearing on "Oversight of the Federal Housing Administration", on Capitol Hill in Washington February 11, 2015. REUTERS/Joshua Roberts

Last month the government mortgage insurer announced it would cut annual mortgage insurance premiums by half a percentage point to 0.85 percent from 1.35 percent, despite having a capital buffer below its statutory minimum.

“Our actions maintain a careful balance between strengthening our fund and advancing our mission,” Housing and Urban Development Secretary Julian Castro, who oversees the agency, told lawmakers on the House of Representatives Financial Services Committee.

“It simply isn’t right to unduly burden borrowers in the present because of the misbehavior of others in the past,” Castro added. 

The FHA does not make loans but insures approved lenders, with the risk priced into the fees borrowers pay.

FHA-insured loans are popular among first-time home buyers and lower-income borrowers, allowing a purchaser to buy a home with a 3.5 percent down payment and lower credit score than required for mortgages backed by Fannie Mae and Freddie Mac.

The Obama administration trumpeted the mortgage insurance reduction as a boost to home ownership, estimating it would result in average annual savings of $900 for two million borrowers and encourage first-time buyers.

But Republicans have chafed at the decision, saying the FHA promotes lending to riskier borrowers at a time when the agency can least afford it and has regularly given inaccurate “rosy” predictions.

“We’ve had this whispered into our ear before… it hasn’t proven true, and again you are in violation of the law that is there to protect taxpayers and home owners and that has got to stop,” Republican Representative Jeb Hensarling, chairman of the committee, said.

Other Republicans on the committee said if a private company operated the same way it would be shut down.

Hensarling said the committee will conduct a “thorough” examination of HUD this year, with Castro committed to appearing again within weeks to explain HUD’s budget submission to Congress.

The FHA’s share of the mortgage insurance market was 33 percent in 2014, down from a high of 69 percent in 2009, according to data from Inside Mortgage Finance.

In 2013, the agency was forced to draw on $1.7 billion of taxpayer funds for the first time in its history. It returned to profit in part by raising the mortgage insurance premium fees it charges borrowers.

Its mortgage insurance fund’s capital ratio stands at 0.41 percent, well below the two-percent legal requirement. The FHA estimates it will reach that minimum in 2016.

Reporting by Lindsay Dunsmuir; Editing by Andrea Ricci

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