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                                                       Calendar No. 275
113th Congress                                                   Report
                                 SENATE
 1st Session                                                    113-129

======================================================================



 
                        FHA SOLVENCY ACT OF 2013

                                _______
                                

                December 19, 2013.--Ordered to be printed

                                _______
                                

 Mr. Johnson of South Dakota, from the Committee on Banking, Housing, 
               and Urban Affairs, submitted the following

                              R E P O R T

                         [To accompany S. 1376]

    The Committee on Banking, Housing, and Urban Affairs, 
having had under consideration S. 1376, a bill to improve the 
Federal Housing Administration and to ensure the solvency of 
the Mutual Mortgage Insurance Fund, and for other purposes, 
having considered the same, reports favorably thereon with 
amendments and recommends that the bill, as amended, do pass.

                              INTRODUCTION

    On July 31, 2013, the Senate Committee on Banking, Housing, 
and Urban Affairs considered S. 1376, entitled ``FHA Solvency 
Act of 2013,'' a bill to improve the Federal Housing 
Administration and to ensure the solvency of the Mutual 
Mortgage Insurance Fund, and for other purposes. The Committee 
voted to report the bill, as amended, to the Senate.

                               BACKGROUND

    The Federal Housing Administration was established by the 
National Housing Act of 1934 as a response to the rapidly 
declining housing market during the Great Depression. It 
provides pooled mortgage insurance for loans made by FHA-
approved lenders throughout the United States and its 
territories. In providing access to affordable mortgage credit, 
FHA plays a countercyclical role in the housing market by 
expanding when private capital is out of reach and contracting 
when private capital is willing to offer borrowers affordable 
terms. FHA also plays a crucial role in providing access to 
credit for first-time homebuyers and middle income families 
during all economic conditions. FHA pays claims on insured 
single-family loans, and since Fiscal Year (FY) 2009, Home 
Equity Conversion Mortgages (HECMs) and condominium loans 
through its Mutual Mortgage Insurance Fund (MMI Fund). The MMI 
Fund is required to be self-supporting, using premiums and 
other fees it earns on insured loans to pay for claims and 
other costs related to those loans rather than appropriations.
    Beginning in 2007, as lenders and private mortgage insurers 
began pulling back from the housing market, FHA dramatically 
increased its market share to fulfill its countercyclical role 
to stabilize credit markets in times of economic disruption. 
Hearing witnesses cited an estimate that the recent housing 
crisis would have been exacerbated without FHA, as home values 
would have fallen an additional 25 percent and 3 million more 
jobs would have been lost.\1\
---------------------------------------------------------------------------
    \1\Addressing FHA 's Financial Condition and Program Challenges, 
Part II: Hearing Before the Committee on Banking, Housing, and Urban 
Affairs, United States Senate, 113th Cong. (2013) (written testimony of 
Gary Thomas, President, National Association of Realtors and Sarah 
Rosen Wartell, President, Urban Institute); Oversight of FHA: Examining 
HUD's Response to Fiscal Challenges: Hearing Before the Committee on 
Banking, Housing, and Urban Affairs, United States Senate, 112th Cong. 
(2012) (written testimony of The Honorable Shaun Donovan, Secretary, 
U.S. Department of Housing and Urban Development).
---------------------------------------------------------------------------
    As a result of the housing crisis and the corresponding 
increase in FHA's portfolio, default rates rose, particularly 
on loans originated during the 2007-2009 time period, and on 
loans guaranteed through the HECM program. The rise in default 
rates led to an increase in FHA's actual and expected losses, 
requiring FHA to use its capital reserves to pay for claims on 
the MMI Fund, which in turn reduced FHA's capital reserve ratio 
below the two percent level required by statute. This decline 
started in FY 2006, leading to a negative 1.44 percent ratio in 
FY 2012. During this time, FHA took actions to reduce the 
severity of their losses on defaulting loans and raised 
insurance premiums. These actions and an improving economy over 
the past year boosted the capital reserve ratio levels. 
However, based on data in the FY 2013 independent actuarial 
report, FHA reported its capital reserve ratio remains negative 
but is projected to achieve the mandatory two percent in FY 
2015.

                       PURPOSE OF THE LEGISLATION

    The FHA Solvency Act of 2013 will strengthen and improve 
the Federal Housing Administration to protect the solvency of 
the Mutual Mortgage Insurance Fund. While FHA has taken steps 
in recent years to improve the safety and soundness of the 
program and tighten oversight of FHA approved lenders, 
additional authority was requested to ensure the solvency of 
the MMI Fund.

                                HEARINGS

    On July 24, 2013, the full Committee held a hearing titled 
``The FHA Solvency Act of 2013,'' to discuss S. 1376. FHA 
Commissioner Carol J. Galante, Assistant Secretary of the U.S. 
Department of Housing and Urban Development, testified at the 
hearing.
    On February 28, 2013, the Committee held a hearing 
entitled, ``Addressing FHA's Financial Condition and Program 
Challenges, Part II.'' The hearing discussed actions FHA could 
take to mitigate losses to the MMI Fund. Witnesses were: Mr. 
Gary Thomas, President, National Association of Realtors; Mr. 
Peter Bell, President, National Reverse Mortgage Lenders 
Association; The Honorable Phillip L. Swagel, Professor in 
International Economic Policy at the Maryland School of Public 
Policy, University of Maryland; Ms. Sarah Rosen Wartell, 
President, Urban Institute; Ms. Teresa Bryce Bazemore, 
President, Radian Guaranty Incorporated; and The Honorable 
David H. Stevens, President and Chief Executive Officer, 
Mortgage Bankers Association.
    On December 6, 2012, the Committee held a hearing entitled, 
``Examining HUD's Response to Fiscal Challenges.'' The witness 
was The Honorable Shaun Donovan, Secretary, U.S. Department of 
Housing and Urban Development. The hearing reviewed actions 
taken by HUD to improve the fiscal health of the MMI Fund as 
well as HUD requests for authority to take additional actions.

             SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1. Short title and table of contents

Section 2. Mortgage insurance premiums

    This section amends section 203(c)(2) of the National 
Housing Act. This section would require the Secretary to charge 
a minimum annual mortgage insurance premium of at least 55 
basis points. It also increases the annual premium cap by 50 
basis points. This section also would require the Secretary to 
evaluate premium levels at least annually to ensure that the 
combined up-front and annual premiums for the life of a loan 
will cover the expected risk to the fund and maintain the 
mandated capital reserve ratio.

Section 3. Prohibition on insuring mortgagors with two prior 
        foreclosures

    This section amends Section 203 of the National Housing Act 
to prohibit FHA insurance on mortgages if the borrower was 
foreclosed upon twice previously.

Section 4. Indemnification by FHA mortgagees

    This section gives the Secretary the authority to seek 
indemnification from mortgagees approved to originate loans 
under the lender insurance program or the direct endorsement 
program. Currently, the Secretary only has the authority to 
seek indemnification from mortgagees under the lender insurance 
program. To qualify for indemnification, the mortgage must have 
a material defect that would have prevented the loan from being 
insured or have involved fraud or misrepresentation. Except in 
cases of fraud or misrepresentation, the loan must have been 
delinquent within 36 months and resulted in a default. If the 
Secretary determines that the fraud or misrepresentation was 
committed by a third-party (not the mortgagee) and that the 
mortgagee had adequate quality control practices and review 
procedures to identify such fraud or misrepresentation, then 
the mortgagee will not be required to indemnify the Secretary. 
The Secretary is required to issue regulations regarding 
requirements for mortgagees, public reporting of loans subject 
to indemnification, and an appeals process.

Section 5. Review of mortgagee performance

    This section amends Section 533 of the National Housing Act 
to expand the criteria the Secretary uses to compare mortgagee 
performance. This section also provides the Secretary with the 
authority to terminate a mortgagee's approval on a national 
basis. Currently, a mortgagee's approval can only be terminated 
in a specific geographical area. The Secretary would also issue 
regulations to establish an appeals process for a termination 
decision.

Section 6. Transfer of mortgage servicing duties

    This section permits the Secretary to issue rules requiring 
an underperforming servicer to contract with a specialty 
subservicer for a single mortgage or any pool of mortgages. 
This section requires the following to be included in the 
rules: the performance conditions that would trigger the 
requirement to use a subservicer; a reasonable time period for 
the servicer to fix the problem or problems before the 
subservicer is required (unless the delay would harm the MMI 
Fund); and the possibility of stricter penalties should the 
servicer have similar problems for a third time. The rules must 
also ensure the authority provided in this section only applies 
to activities that may materially and adversely affect the 
Secretary's ability to recover in the future and be limited to 
mortgages that share similar underwriting, borrower, and 
performance characteristics.

Section 7. Easing regulatory burdens; resource guide

    This section directs the Secretary to establish a single 
resource guide for lenders and servicers regarding the 
requirements, policies, processes, and procedures that apply to 
loans insured by FHA. This section also requires that the guide 
be made publicly available and posted on HUD's website.

Section 8. Improving underwriting standards

    This section directs the Secretary to evaluate and revise 
as necessary FHA's underwriting standards using criteria 
similar to the CFPB's criteria for Qualified Mortgages. 
Criteria which the Secretary must evaluate include a borrower's 
income and financial resources, monthly mortgage payment, other 
debts, employment status (if employment income is included in 
financial resources), debt-to-income ratio, and credit history.

Section 9. Ensuring adequate capital levels in the Mutual Mortgage 
        Insurance Fund

    This section amends section 205 of the National Housing Act 
to require that the MMI Fund achieve a capital reserve ratio of 
3 percent within 10 years of enactment. It establishes 
escalating reporting requirements and program evaluations that 
take effect immediately if the capital ratio falls below 
required levels depending on how undercapitalized the fund is 
in comparison to the mandated capital reserve ratio. The fund 
shall be designated as undercapitalized in the event that the 
capital reserve ratio is less than 100 percent but not less 
than 50 percent of the ratio required by statute. The fund 
shall be designated as significantly undercapitalized in the 
event that the capital reserve ratio is less than 50 percent of 
the required ratio but not less than zero of the ratio required 
by statute. And finally, the fund shall be designated as 
critically undercapitalized in the event that the capital 
reserve ratio is negative. With each designation this section 
mandates escalating transparency requirements regarding the 
state of the fund. It also sets out a process for additional 
assessments of risk and additional premium surcharges as 
applicable. The 6-month process for imposing premium surcharges 
would apply if:
          (1) the MMI Fund is critically undercapitalized 2 
        years after enactment of the FHA Solvency Act and 
        thereafter, as indicated in the actuarial report;
          (2) after submission of the FY2016 actuarial report, 
        the MMI Fund has not achieved a 2 percent capital 
        reserve ratio;
          (3) after the submission of the FY2016 actuarial 
        report but prior to the earlier of 10 years after the 
        date of enactment or the date the Fund achieves 3 
        percent, there is a decrease in the value of the ratio 
        from one report to the next, as determined by the 
        independent actuary, without a concurrent drop in 
        market share;
          (4) the capital reserve ratio fails to achieve and 
        maintain 3 percent by the date that is 10 years after 
        enactment and thereafter, as indicated in the actuarial 
        report.

Section 10. Stress testing of the Mutual Mortgage Insurance Fund

    This section amends Section 202 of the National Housing Act 
to require the Secretary's annual report on the independent 
actuary's study include an alternative stress test scenario, 
which the Secretary shall develop. The alternative stress test 
should be developed to help assess the financial status of the 
Mutual Mortgage Insurance Fund, and may rely on assumptions 
used by the Federal Reserve Board's Comprehensive Capital 
Analysis and Review (CCAR) stress tests, if those assumptions 
are relevant to the financial status of the MMI Fund. This 
section does not limit how many alternative stress test 
scenarios may be included. While any alternative stress test 
scenario should be utilized to support sound financial planning 
for the MMI Fund, the published results from these alternative 
scenarios should not be binding for purposes of the MMI Fund 
achieving mandatory capital reserve minimums.
    Additionally, this section is not intended to restrain or 
otherwise alter how the Federal Reserve Board and other 
regulators design and administer stress tests, including those 
required by the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, for entities they regulate.

Section 11. Congressional notification of use of certain authorities 
        with respect to the FHA

    This section requires the Secretary of the Treasury to 
notify the Committee on Banking, Housing, and Urban Affairs and 
the Committee on Financial Services within 48 hours of 
exercising its permanent, indefinite authority under 2 U.S.C. 
661c(f) to fund re-estimates of the FHA's Mutual Mortgage 
Insurance Fund. The Secretary of HUD is also required to notify 
the same Committees within 48 hours of receiving funds pursuant 
to the permanent, indefinite authority to cover a downward re-
estimate. Both notices must also be put on the websites of 
Treasury and HUD. Any report that the HUD Secretary is required 
to submit to Congress shall include the total amount that must 
be paid back to Treasury.

Section 12. Establishment of Deputy Assistant Secretary and Chief Risk 
        Officer of FHA

    This section creates a Chief Risk Officer within the FHA 
and establishes the criteria for the position. It also requires 
the Officer to conduct an annual study of the lowest performing 
loans.

Section 13. Disclosure of events

    This section requires the disclosure of any event that 
occurs between the finalization of the Annual Actuarial Report 
and the submission of the Annual Report to Congress that might 
affect the report's findings. This disclosure shall be released 
as an addendum to the Report to Congress with an accompanying 
letter serving as a summary.

Section 14. GAO study on disclosures

    This section would direct the GAO to examine HUD's 
disclosure of FHA data and to consult with prominent academics 
with housing market experience regarding the data that is 
disclosed. The GAO is asked to make recommendations regarding 
the data disclosed by the Secretary and to conduct a follow-up 
study regarding implementation of the recommendations one year 
after the study is complete.

Section 15. Stabilizing the HECM program

    This section limits the Secretary's authority to change the 
HECM program by mortgagee letter to only those changes that 
involve escrow accounts or set-asides, financial assessments, 
or loan limits. Any such changes by mortgagee letter must be 
accompanied by a rulemaking. This will allow the Secretary to 
make changes quickly without eliminating the option for public 
comment. However, the Secretary's authority to use mortgagee 
letters to change the HECM program will expire two years after 
enactment of this section. This section also makes several 
statutory changes to the HECM program. The Secretary must: 
issue a rule eliminating the standard fixed-rate, full draw 
option and mandating a financial assessment of the mortgagor 
for any other fixed-rate full draw products; require an escrow 
or set-aside account if doing so would mitigate the risk of 
loss, given the mortgagor's financial situation; and submit 
quarterly reports on the financial status of each product 
offered under the HECM program to the Committee on Banking, 
Housing, and Urban Affairs and the Committee on Financial 
Services.

Section 16. Principal limit factor for HECM program

    This section amends Section 255 of the National Housing Act 
to tighten the principal limit on fixed rate home equity 
conversion mortgages.

Section 17. Publication of final rules relating to limiting seller 
        contributions towards purchase related expenses

    This section directs HUD to finalize their proposed seller 
concessions rule.

Section 18. GAO study on FHA loan limits

    This section requires the GAO to conduct a one-time study 
on the principal loan limits for FHA-insured mortgages. The 
study requires GAO to make recommendations on the methodology 
to adjust the loan limits, taking into consideration inflation, 
geographic price differences, and countercyclical demands.

                          COST OF LEGISLATION

               CONGRESSIONAL BUDGET OFFICE COST ESTIMATE

    Summary: S. 1376 would make several changes to current law 
aimed at improving the financial safety and soundness of the 
Federal Housing Administration's (FHA's) Mutual Mortgage 
Insurance (MMI) fund. That fund records the transactions of two 
housing programs operated by FHA: the single-family mortgage 
guarantee program and the Home Equity Conversion Mortgage 
(HECM) program. The bill would require FHA to take certain 
corrective actions if the annual actuarial review of the MMI 
fund indicates that the fund's capital ratio has fallen below 
certain targets and would require FHA to make other 
administrative changes to the processes they use to oversee the 
single-family and HECM programs.
    CBO estimates that implementing S. 1376 would result in a 
net decrease in discretionary spending of $514 million over the 
2014-2018 period, assuming enactment of appropriation laws 
necessary to implement the legislation's provisions. This 
legislation would not affect direct spending or revenues; 
therefore, pay-as-you-go procedures do not apply.
    S. 1376 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act (UMRA).
    Estimated cost to the Federal Government: The estimated 
budgetary impact of S. 1376 is shown in the following table. 
The costs of this legislation fall within budget function 370 
(commerce and housing credit).

----------------------------------------------------------------------------------------------------------------
                                                              By fiscal year, in millions of dollars----
                                                    ------------------------------------------------------------
                                                       2014      2015      2016      2017      2018    2014-2018
----------------------------------------------------------------------------------------------------------------
                                  CHANGES IN SPENDING SUBJECT TO APPROPRIATION

FHA Insurance Premiums:
    Estimated Authorization Level..................         0         0         0         0      -524       -524
    Estimated Outlays..............................         0         0         0         0      -524       -524
Other Costs:
    Estimated Authorization Level..................         2         2         2         2         2         10
    Estimated Outlays..............................         2         2         2         2         2         10
    Total Changes:
        Estimated Authorization Level..............         2         2         2         2      -522       -514
        Estimated Outlays..........................         2         2         2         2      -522      -514
----------------------------------------------------------------------------------------------------------------
Note: FHA = Federal Housing Administration.

    Basis of estimate: For this estimate, CBO assumes that the 
bill will be enacted near the start of calendar year 2014 and 
that the necessary amounts will be appropriated each year.

FHA insurance premiums

    Currently the MMI fund is required to maintain a 2 percent 
capital ratio. (The capital ratio measures FHA's cash on hand 
relative to the value of all outstanding mortgages insured by 
the agency.) Enacting this legislation would require FHA to 
evaluate the premiums it charges for mortgage insurance on an 
annual basis and the MMI fund to achieve a capital ratio of 3 
percent within 10 years of enactment. The legislation also 
would establish additional reporting requirements and require 
program evaluations and programmatic changes if the fund 
doesn't meet certain targets as it builds towards the proposed 
3 percent capital ratio over the next 10 years. For example, 
FHA would be required to impose a surcharge of 10 basis points 
on its guarantees if the actuarial report for fiscal year 2016 
indicates that the capital ratio is less than 1.25 percent.
    CBO estimates that under current law, FHA will charge 
borrowers insurance premiums sufficient to maintain a capital 
ratio that exceeds 1.25 percent in the next couple of years, so 
we expect that, under the bill, FHA would not impose the 10 
basis point surcharge in 2016. However, under the bill, CBO 
expects that FHA would probably increase its initial and annual 
insurance premiums beginning in 2018 in order to achieve a 3 
percent capital ratio in the MMI fund by 2023; such increases 
in premiums would result in an increase in offsetting 
collections totaling $524 million in 2018 (and further 
increases in collections in subsequent years), assuming 
commitment authority to operate the single-family program is 
included in future appropriation acts.

Other costs

    Based on estimates of the cost of similar programmatic 
activities, CBO estimates that the additional reporting 
requirements and other administrative activities required to 
maintain adequate capital balances in the MMI fund would cost 
$10 million over the 2014-2018 period, subject to the 
availability of appropriated funds.
    Implementing S. 1376 would change various processes used by 
FHA to oversee the single-family and HECM programs. The bill 
would require FHA to:
           Issue regulations to establish a nationwide 
        appeals process for terminating a borrower's approval;
           Issue regulations related to loans subject 
        to indemnification; and
           Alter the management of the HECM program 
        through letters to mortgagees and rulemaking 
        procedures.
    The Government Accountability Office also would be required 
to produce a report on the appropriate methodology for 
adjusting FHA's loan limits and a report examining FHA's 
procedures for disclosure of its housing program data.
    Pay-as-you-go considerations: None.
    Estimated intergovernmental and private-sector impact: S. 
1376 contains no intergovernmental or private-sector mandates 
as defined in UMRA and would impose no costs on state, local, 
or tribal governments.
    Estimate prepared by: Federal Costs: Susanne S. Mehlman and 
Chad Chirico; Impact on State, Local, and Tribal Governments: 
J'nell L. Blanco; Impact on the Private Sector: Paige Piper/
Bach.
    Estimate approved by: Theresa Gullo, Deputy Assistant 
Director for Budget Analysis.

                      REGULATORY IMPACT STATEMENT

    In accordance with paragraph 11(b), rule XXVI, of the 
Standing Rules of the Senate, the Committee makes the following 
statement concerning the regulatory impact of the bill.
    This legislation will not have a substantial regulatory 
impact because it makes several changes to the administration 
of the Federal Housing Administration (FHA), its programs, and 
its authorities, but does not place requirements on businesses 
or individuals directly. Changes to FHA programs may affect the 
businesses or individuals who choose to participate in the FHA-
insured mortgage market.

                 CHANGES IN EXISTING LAW (CORDON RULE)

    On July 31, 2013, the Committee unanimously approved a 
motion by Senator Johnson to waive the Cordon rule. Thus, in 
the opinion of the Committee, it is necessary to dispense with 
section 12 of rule XXVI of the Standing Rules of the Senate in 
order to expedite the business of the Senate.