March 10, 2010 / 10:41 PM / 10 years ago

UPDATE 1-U.S. FHA chief says FHA not next subprime

(Adds details, background)

By Corbett B. Daly

WASHINGTON, March 10 (Reuters) - Capital reserves of the Federal Housing Administration have fallen too swiftly, but loans backed by the government agency are not the next “subprime” mortgage crisis waiting to happen, Federal Housing Administration chief David Stevens said on Wednesday.

“While its Capital Reserve Account has decreased too quickly, FHA is not ‘the next subprime’ as some have suggested,” Stevens said in prepared testimony to the House Financial Services Subcommittee on Housing and Community Opportunity. The panel posted his testimony, scheduled for delivery at a hearing on FHA reform on Thursday, on its website.

“Unlike subprime lenders, FHA requires that borrowers demonstrate they can pay their mortgage by verifying their income and employment,” Stevens said, noting the subprime delinquencies are 240 percent more than FHA delinquencies.

Still, Stevens acknowledged that the FHA has made mistakes and did not properly manage its risk.

“Credit and risk controls were antiquated. Enforcement was weak. And our personnel resources and IT systems were inadequate,” Stevens said, noting that the FHA has announced a series of credit policy changes to help rebuild reserves.

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 percent required by law, according to an independent actuarial study released late last year.

Stevens expressed confidence the FHA’s Capital Reserve Account would return to levels above 2 percent and said the recent changes to FHA underwriting standards would bring an additional $5.8 billion to FHA coffers. The non-partisan Congressional Budget Office estimates those changes will bring just $1.9 billion to the FHA.

Since about 80 percent of the FHA’s business is with first-time home buyers, who typically make smaller down payments, the FHA’s role in the housing market is widely seen as vital.

FHA’s share of the mortgage market has ballooned as private capital has dried up.

“As important as FHA is at this moment, I want to emphasize that the elevated role it is playing is temporary—a bridge to economic recovery helping to ensure that mortgage financing remains available until private capital returns,” Stevens said. (Reporting by Corbett B. Daly, Editing by Kenneth Barry)

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