The Federal Housing Administration (FHA) insures home mortgages
made by private lenders against the possibility of borrower
default. If the borrower does not repay the mortgage, FHA pays the
lender the remaining principal amount owed. By insuring lenders
against the possibility of borrower default, FHA is intended to
expand access to mortgage credit to households, such as those with
smaller down payments or below-average credit histories, who might
not otherwise be able to obtain a mortgage at an affordable
interest rate or at all. FHA also traditionally plays a
countercyclical role in the mortgage market. In other words, it
generally insures more mortgages during periods when lenders and
private mortgage insurers tighten their lending standards and
reduce activity in response to market conditions, and it generally
insures fewer mortgages at times when lenders and private mortgage
insurers make mortgage credit more easily available. When an
FHA-insured mortgage goes to foreclosure, the lender files a claim
with FHA for the remaining amount owed on the mortgage. Claims on
FHA-insured loans have traditionally been paid out of an account,
known as the Mutual Mortgage Insurance Fund (MMI Fund), that is
funded through fees paid by borrowers, rather than through
appropriations. However, if FHA were ever unable to pay claims that
it owed, it can draw on permanent and indefinite budget authority
with the U.S. Treasury to pay those claims without additional
congressional action. In recent years, increased default and
foreclosure rates, as well as economic factors such as falling
house prices, have contributed to an increase in expected losses on
FHA-insured loans. This increase in expected losses has put
pressure on the MMI Fund and reduced the amount of resources that
FHA has on hand to pay for additional, unexpected future losses.
This has led to concern that FHA may need to draw on its permanent
and indefinite budget authority for funds from Treasury to hold in
reserve to pay for these higher expected future losses, or,
eventually, to pay insurance claims. An annual actuarial review of
the MMI Fund released in November 2012 showed that, according to
current estimates, FHA does not currently have enough funds on hand
to cover all of its expected future losses on the loans that it
currently insures. The results of this actuarial review heightened
concerns that FHA could need funds from Treasury. However, whether
FHA actually needs to draw funds from Treasury would be determined
as part of the annual budget process, not by the actuarial review.
FHA faces an inherent tension between protecting its financial
health and fulfilling its mission of expanding access to mortgage
credit. In addition, the share of mortgages insured by FHA has
increased in the past several years as the availability of mortgage
credit has tightened, further contributing to this tension. FHA has
recently proposed or implemented a number of changes to its
single-family mortgage insurance program that are intended to
minimize risk to the MMI Fund while still allowing FHA to support
the mortgage market and expand access to affordable mortgages.
These changes have included increasing the fees that it charges to
borrowers for insurance, modifying its underwriting criteria, and
taking steps to increase oversight of lenders who make FHA-insured
loans. While many of these changes were made administratively by
FHA, some involved congressional action. Congress has also weighed
additional changes to FHA's programs, and has considered additional
legislation aimed at protecting the financial health of the MMI
Fund. An example of such a bill is the FHA Emergency Fiscal
Solvency Act of 2012 (H.R. 4264), which passed the House of
Representatives during the 112th Congress. An identical bill (S.
3678) has been introduced in the Senate.
General
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