The Senate Banking, Housing and Urban Affairs Committee approved Chairman Tim Johnson, D-S.D., and Ranking Member Mike Crapo’s, R-Idaho, bipartisan FHA Solvency Act of 2013, S1376. The bill passed by a vote of 21-1, and included a manager’s amendment incorporating proposals from committee members from both parties that will further strengthen the Federal Housing Administration’s (FHA) books, better protect taxpayers and ensure qualified borrowers continue to have access to credit.

“This bill will give the FHA the tools it needs to get back on track, so it can continue to help qualified borrowers realize the dream of homeownership and provide stability to the housing market in times of stress,” Johnson said. “This was a bipartisan effort from start to finish. The reforms we approved today are the product of a lot of hard work from members on both sides of the aisle, and I appreciate the spirit of bipartisanship and open debate that my colleagues on the Committee demonstrated throughout the amendment process.”

“In the spring, Chairman Johnson and I announced that putting the FHA on a solid foundation was one of our top priorities,” Crapo said. “Today’s legislation takes many important steps toward laying that foundation and I thank Chairman Johnson, along with all the members of the Committee, for their work in this effort. I look forward to continuing this strong bipartisan process as we quickly turn our attention toward important, comprehensive reforms to our mortgage market.”

The FHA has helped stabilize the mortgage market since its creation in 1934, by ensuring qualified low- to moderate-income and first-time home buyers have access to mortgage credit. During the 2007-2008 financial crisis the agency served as a critical source of credit and prevented a catastrophic collapse in home values, saving an estimated 3 million jobs and $500 billion in economic output. However, FHA loans made at the height of the crisis suffered heavy losses, and without Congressional action the agency’s balance sheets will remain at risk.

Johnson and Crapo say the bill will give the FHA tools to improve its financial condition, including strengthened underwriting standards, enhanced lender accountability measures, and reforms to the FHA’s reverse mortgage program. The FHA has already taken steps to address its losses using existing authorities, and the additional flexibility granted by the bill will enable it to stabilize its balance sheet and better protect taxpayers.

The Johnson-Crapo FHA Solvency Act will:

Strengthen underwriting and promote long-term solvency

• Create an advance warning system by raising the minimum for the Mutual Mortgage Insurance Fund’s capital reserve ratio to three percent. If the capital ratio doesn’t meet certain targets as it builds to the new minimum ratio, the bill would require the department of Housing and Urban Development (HUD) to take immediate action to address the shortfall while keeping Congress fully informed. This increased accountability and transparency will help ensure taxpayers are not unexpectedly left on the hook for bailouts.
• Require minimum annual mortgage insurance premiums to improve the long-term solvency of the FHA program. The premium levels will be reevaluated annually to ensure that the premiums cover loans’ expected risk and maintain the capital reserve ratio.
• Require HUD to evaluate and revise, as necessary, underwriting standards using criteria similar to the Consumer Financial Protection bureau’s qualified mortgage rule. This will help better ensure borrowers get loans they can afford, and avoid foreclosure.

Improve lender accountability

• Require HUD to consolidate guidelines for lenders and servicers regarding the requirements, policies, processes and procedures that apply to loans insured by FHA. This will eliminate confusion, clarify lending and servicing standards, and ease regulatory burdens.
• Provide HUD with broad new tools to hold lenders accountable for issuing inappropriate or fraudulent mortgages. Currently, HUD is limited in the damages it can seek from bad actors in the mortgage market. These new authorities will better protect taxpayers and hold lenders accountable when they break the rules.

Stabilize reverse mortgage program

• Help stabilize FHA’s reverse mortgage program by giving the HUD secretary greater operational and regulatory flexibility, while preserving opportunities for public comment.