FHA Reform Act of 2010
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Mr. GARRETT of New Jersey. I yield myself 3 minutes.
I want to begin by restating the obvious, and that is, the FHA right now is in serious financial trouble. Their book of business during 2005 and 2006 and 2007 was really pretty small back then, and in 2008, FHA's lending took off to really high levels and currently is around 30 percent of the market. Typically, the default from mortgages occurs not in the first couple of years but in three, four, five, six, and seven years.
So we've already seen a sharp increase in delinquency and defaults with the FHA book, and we've not even gotten into the typically bad areas, the problem years for 2008 and 2009 so we're probably going to see those numbers go off the track.
Some of my colleagues on the other side of the aisle may say that there isn't going to be a problem because underwriting standards have tightened up some and the average FICO score has gone up. If you think about it, that really misses the point. In the mortgage business, you make pennies and you lose dollars. Because of the tremendous increase in volume, the FHA has insured thousands of more loans from higher credit borrowers but they insured thousands of more loans from more credit risky borrowers, too. Those numbers just aren't going to balance out. So, when the FHA has to pay a claim on default, it costs significantly more than the proceeds, than the few extra pennies they get by issuing more loans. For example, the premiums from 10 additional good loans would not cover the losses from 10 additional riskier loans in default. In fact, I doubt it would cover even one.
This point also debunks the claim that if you raise the down payment you will hurt the FHA because the accompanying reduction in volume will not allow them to collect as many fees. Why is that? The more loans you insure, the more defaults you will experience and you will not be able to recoup the losses with those additional premiums.
A second point. Another argument they will make is that the FHA's LTV ratio, the loan-to-value ratio, above 95 percent are a lower percentage of the books today than they were just a few years ago, but this fails to acknowledge that it's because their book has grown so much over the last few years. So I would argue this, that of the total numbers, there are significantly more loans over there that are above 95 percent LTV and over 96.5 which is a critical number simply because of their ability to finance the up-front premiums now. And with more loans with higher LTVs means what? More riskier loans.
FHA's own actuarial report says this: ``Based on previous econometric studies of mortgage behavior, a borrower's equity position in the mortgaged house is one of the most important drivers of default behavior. The larger the equity position a borrower has, the greater the incentive to avoid default on the loan.''
So that's why I've come up with this amendment. It's not a 20 percent down payment or 15 percent or even a 10 percent, which many private lenders right now require, but we go for the reasonable one, the compromise, 5 percent down payment. I support home owners as much as the next guy, and I want everybody to be able to afford their own home if they could. But we have to learn something from our past history, and we have to be responsible here in this House.
I find the debate over the problems with the FHA eerily similar to the debates we've had leading up to Fannie Mae and Freddie Mac. As taxpayers now are pumping hundreds of billions of dollars into Fannie and Freddie now, history has shown that we were on the right side of the debate then with Fannie and Freddie then, and I want to make sure that when this FHA bill goes through this House now, and at the conclusion of this debate as well, I want to make sure that myself and all of my colleagues are on the right side of this debate as well.
So I urge my colleagues to be all on the right side of this, this debate in history and to support my amendment.
I reserve the balance of my time.
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Mr. GARRETT of New Jersey. Mr. Speaker, to close, I take, to begin with, the words of the gentlewoman from Illinois who really makes my case in her amendment which, really, unfortunately, does not go far enough. She says, on the floor, that the FHA does need clear direction what to do in this area of downpayments. Unfortunately, they have not done the job up to this point in time, and now she says we have to give them that clear direction. That is what my amendment would do.
In no uncertain terms, we would say that those people who are not the best risks out there should have a minimum of 5 percent down. I also take from her very own words, she points out the fact that one out of four homes right now are under water. Well, do we want to find ourselves in this situation again 4 or 5 years from now from those very same people when one out of four homeowners are under water when they only have a few couple of percentage points down on their house that they are going to say, I can simply walk away from this house because there is really not much of an investment in it.
I don't think we want to rehash this argument again. I don't think we want to be in this situation again where the American taxpayer is put on the hook, just as it is now, to the tune of $400 billion over the life of the GSAs. We don't want to have to come out and bail out FHAs.
Let's do the prudent thing right now. Let's be on the right side of history and make sure we have a prudent downpayment for FHA loans.
I yield back the balance of my time.
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