Oral Testimony of Secretary Julián Castro
U.S. House Committee on Financial Services
Hearing on the Federal Housing Administration
Wednesday, February 11, 2015
As prepared for delivery
Chairman Hensarling, Ranking Member Waters, members of the Committee — thank you for inviting me to speak with you today about the Federal Housing Administration’s efforts to expand opportunities for working families, to further strengthen the Mutual Mortgage Insurance Fund, and to help continue the economic momentum our nation is building every day.
We gather this morning at an important time for our nation. 2014 was the best year for job growth since the 1990s. Over the last 59 months, businesses have created 11.8 million new jobs — the longest streak of private sector job growth on record. And in recent years we’ve seen existing single-family home sales rise 50 percent, housing starts double, and home equity grow by more than $4 trillion.
It’s clear that housing is reemerging as an engine of economic prosperity. The Federal Housing Administration has been instrumental in this progress. It’s provided access to credit for generations of underserved borrowers and has been a stabilizing force in the housing market.
Unfortunately, there are some who try to include FHA with all the bad actors that caused the housing crisis. That could not be more wrong. FHA never pushed the toxic products that did so much damage. It didn’t bring down the market — it saved it.
FHA both stepped in and stepped up to fill the void created when private capital retreated — work that independent economists say prevented a further collapse in home prices. And now that our nation has turned the page on the crisis, we have a responsibility to give more Americans the chance to participate in this growth.
One challenge we must address is the high cost of homeownership. FHA raised its annual mortgage insurance premiums by 145% between 2010 and 2014. Think about what this means for folks who got an FHA-backed loan last Fiscal Year. FHA will collect an average of $17,000 in fees from them over the life of that loan. And, for those who may encounter hardship, we expect the average loss to be only $4,700.
These numbers show that the costs facing families that want to pursue the American Dream are too high — and unnecessarily so. And it simply isn’t right to unduly burden borrowers in the present because of the misbehavior of others in the past. That’s why last month FHA took action to restore some fairness in the market and to make homeownership more affordable for working families.
FHA reduced annual mortgage insurance premiums by a modest half a percentage point. We expect this to save more than 2 million households over $2 billion during the next three years. That’s money that can now be used on everything from a child’s education to retirement savings. It will also encourage more than 250,000 new borrowers to enter the market, and create tens of thousands of jobs.
FHA is in a strong position to take this modest measure. We’ve taken aggressive action to improve our underwriting standards, including introducing a credit score floor, requiring a higher down payment from borrowers with a FICO score under 580, and imposing higher minimum net worth requirements for lenders — and FHA is back in the black as a result.
Our Mutual Mortgage Insurance Fund has a net worth of $4.8 billion according to the independent actuary’s most recent annual report to Congress. It’s grown more than $21 billion in just two years. Even with the reduction, premiums are still 50% higher than pre-crisis levels.
Furthermore, we expect the Fund’s value to grow by at least $7 billion annually over the next several years, with the expectation that we’ll exceed the 2 percent ratio within 2 years. And our loans will still represent quality because our underwriting standards ensure that we’re lending to responsible borrowers.
So our actions maintain a careful balance between strengthening our fund and advancing our mission. That’s why dozens of nonpartisan groups—from the National Association of Realtors to the National Community Reinvestment Coalition to the Mortgage Bankers Association—are supporting our measures. And we’ll continue to work with stakeholders to preserve FHA’s role as a champion for opportunity.
Over its 80-year history, FHA has helped 40 million families become homeowners and more than half of all first-time homebuyers. In the states this Committee represents, nearly seven million households have FHA insured loans. FHA—as well as Ginnie Mae—also sparks robust economic activity, from the construction site to the local hardware store, to the investment community.
This work has played a critical role in growing the American middle class. With so many Americans working incredibly hard every single day to advance their position in life just a little bit, the question you and I must answer now is this: how can we continue to strengthen the MMI Fund and ensure that everyone who’s responsible and ready and willing to own can achieve their dreams in a growing housing market?
The good news is that HUD and this Committee have a track record. We’ve partnered for progress before — from adjusting the HECM program to eliminating seller-funded down payment assistance, measures that have strengthened the Fund.
Thank you for your bipartisan support. And I look forward to continuing this work to ensure that FHA provides a pathway to prosperity for the American people. Opportunity is our mission and responsibility is our approach. That’s what this premium reduction supports.
Thank you very much.