Subcommittee on Housing and Transportation

Hearing on Congressional Proposals Impacting FHA Reserves

Prepared Testimony of the Honorable William C. Apgar
Assistant Secretary of Housing & Federal Housing Commissioner
Department of Housing and Urban Development

9:30 p.m., Tuesday, September 12, 2000 - Dirksen 538

Good Morning Chairman Allard, Ranking Member Kerry and members of the Subcommittee. My name is William Apgar, and I am the Assistant Secretary for Housing/Federal Housing Commissioner at the United States Department of Housing and Urban Development (HUD). On behalf of HUD Secretary Andrew Cuomo, I want to thank you for the opportunity to testify today on how best to utilize the financial strength of the FHA to address the nation’s critical affordable housing and homeownership needs.

As you know, on March 6, 2000, HUD released its annual actuarial review of the Mutual Mortgage Insurance (MMI) fund of the Federal Housing Administration (FHA). The review, conducted by the auditing firm, Deloitte & Touche (D&T), found that the economic value of the fund in fiscal year 1999 was more than $5 billion above the value estimated a year earlier. In announcing this news Secretary Cuomo invited a widespread debate as to how best to evaluate the financial health of the fund and how to build on this strength to address the Nation’s critical affordable housing and homeownership needs. In addition to HUD’s own review, these questions are the subject of ongoing reviews by the Office of Management and Budget (OMB), the General Accounting Office (GAO), the Congressional Budget Office (CBO), and have sparked a series of legislative proposals that are the focus of today’s hearing.

While HUD continues to enhance the tools used to measure the economic health of the fund in anticipation of the preparation of the FY2000 actuarial review, we have concluded that the actuarial review provides sound evidence of a substantial improvement in the current and future fiscal health of the Fund. In particular, the Deloitte & Touche results demonstrate clearly that the Fund’s projected earnings per dollar of mortgage guaranteed will be significantly higher than anticipated in the FY 2001 Budget. Equally clear is the fact that the Nation faces a shortfall in the supply of affordable housing. Following a brief summary of the actuarial review, I will present my ideas on how additional resources might be used to increase availability of affordable housing.


In July of this year, the Nation’s homeownership rate reached a record high with 67.2% of American families owning their own homes. This meant that a total of 71 million families owned their homes, an increase of 8.6 million since 1993. In addition to the overall increase, record high levels of homeownership were also recorded for central city residents, as well as among African American and Hispanic families.

FHA has played an enormous role in helping families realize the dream of homeownership. Since 1934, FHA has helped nearly 30 million American families to become homeowners. We do this by insuring home mortgages, providing valuable credit enhancement that encourages private lenders to make home loans they otherwise would deem too risky. Last year alone, FHA insured nearly 1.3 million loans with an all time record value of $125 billion. Perhaps most importantly, FHA provides this valuable service to the American homebuying public at no cost to the taxpayer. The insurance premiums we collect plus recoveries on properties sold from the real estate owned (REO) inventory exceed the cost of all claims and operations. Indeed, over the next five years, FHA is projected to contribute nearly 20 billion dollars to the national budget surplus.


Under the leadership of Secretary Andrew Cuomo, HUD has been working hard to reform the Department and the FHA. Nowhere is the turnaround more evident that in the FHA’s mortgage insurance programs. Despite a six-decade history of providing access to mortgage capital – in all regions of the country – in good times and bad – by the early 1990s the FHA was broke. Years of mismanagement left the FHA with projected losses from claims on mortgage insurance far in excess of projected revenue. Absent radical restructuring, a costly federal bailout seemed inevitable.

Today, the FHA and its Mutual Mortgage Insurance (MMI) Fund are the healthiest they have been in decades. The most recent actuarial study -- prepared by Deloitte & Touche – provides detailed information on the financial status of the MMI Fund for the fiscal year ending September 30, 1999, and presents projections of the Fund’s performance over the next five years. The Deloitte & Touche review focuses on two key measures of the health of the fund: First, the economic value of the MMI fund – defined as the sum of existing capital plus the value of current books of business – and second, the FHA’s capital adequacy ratio – defined as the economic value of the fund divided by the total unamortized insurance in force. In specific, the report shows:

As these data indicate, this is a remarkable turnaround from just ten years ago, when the FHA MMI fund had an economic value of negative $2.7 billion. The Deloitte & Touche study is evidence of fundamental improvements in the FHA, including improved underwriting of loans, expanded lender and appraisal monitoring, more effective use of loss mitigation, and streamlined procedures for sale of foreclosed properties. As a result of this progress, the Deloitte & Touche report projects that the FHA is sufficiently well capitalized to withstand future economic downturns. Deloitte & Touche estimates that:


While FHA’s Actuarial Report is good news in and of itself, I am equally pleased to report that the FHA has been able to dramatically improve its financial bottom line, while simultaneously improving its record of service to first-time homebuyers, minorities, and others not well served by convention market:

I am particularly proud of FHA’s record of serving African-American and Hispanic- American families:


The growing economic health of the FHA and the solid record of expanding access to homeownership are dramatic evidence that HUD works. Secretary Cuomo’s Management Reform plan has transformed HUD from top to bottom, bringing to HUD new ways of doing business, new technology, and new capacity to address the housing and community development needs of the Nation’s low and moderate income families and communities.B. 21st Century Housing FundB. Affordable Housing ProposalsB. Affordable Housing Proposals

Even so, much more needs to be done. HUD’s recent Worst Case Housing Needs report to Congress found a record number of very low-income households, more than 5.4 million households, pay more than 50 percent of their income for housing or live in severely sub-standard units. The large majority of these families are renters, highlighting the growing divide between homeowners and renters. Furthermore, the Nation’s stock of affordable rental housing has continued to decrease, with shrinkage focused within the supply of units affordable to extremely low-income families -- those making less that 30 percent of median income.

At the same time, it is important to continue efforts to extend homeownership opportunities to those not well served by the private mortgage market. Even as the Nation celebrates record high homeownership rate, the minority homeownership rate, while growing faster than any other segment of the population, still lags too far behind that of white Americans. Helping renters move up the housing ladder to homeownership should also be a priority.

HUD has over the last several months held several public meetings to brief dozens of organizations on the improved performance of FHA and what we collectively know about America’s housing needs and to discuss possible uses of any additional spending on affordable housing. As a result of these meetings HUD has seen an overwhelmingly positive response with dozens of individuals and organizations advancing various proposals. Responses have ranged from general ideas advanced by individual citizens with an interest in housing policy, to very detailed policy studies and proposals put forward by organizations such as the National Training and Information Center (NTIC), the Low Income Housing Coalition and others Examples of such proposals follow, each assuming $1 billion in annual funding:

First priorities should be to approve the President’s full request for HUD as set out in the President’s FY 2001 Budget. If additional resources are made available, they could be used to promote a balanced housing program that could support production of affordable rental housing for mixed income use, including rental units set aside for low income tenants holding portable vouchers. Recognizing that no vehicle reaches more first-time and minority homeowners than FHA, such a program also could provide premium refunds for existing FHA insured homeowners and reduce the premiums for future FHA homeowners. In addition to expanding homeownership opportunity for working families, especially minorities and others who have been underserved by the conventional mortgage market, these steps would also continue to improve the health of the FHA by increasing volume safely. It is clear that additional funds could have a dramatic impact in addressing the Nation’s diverse and pressing housing needs. With the Nation currently facing a variety of pressing housing needs, a number of alternatives merit consideration by this Committee and the housing community at large.


A range of possible uses of FHA resources is reflected in the various legislative proposals under review by this Committee. In moving forward, it is important that Congress comes to a clear understanding as to what constitutes the capital adequacy ratio sufficient to maintain the economic health of the fund. While HUD recognizes that the Congressionally mandated capital adequacy ratio of 2.0 percent represents a minimum cushion for safety and soundness, today the ratio stands as 3.66 and is forecast to rise steadily over the next five years under a variety of economic scenarios. Answering the question: "What capital adequacy ratio is sufficient to preserve the health of FHA MMI fund?" has important implications for the future of Federal housing policy.

Assuming, as do several of the current legislative proposals, that a capital adequacy ratio of 3.0 percent is judged sufficient to maintain the health of the fund, then the Deloitte &Touche Actuarial Review implies that over the next five years, FHA would generate $17 billion in excess of what is needed to maintain this level of reserves. Higher capital requirements, or changed economic forecasts would of course alter these estimates. That is why it is important that any future legislation link the use of FHA resources to the actual performance of the fund. Failure to maintain this simple financial discipline could inadvertently return the FHA to the near-bankrupt conditions that existed at the beginning of the decade.


Despite the strong economy, many people and places are left behind, struggling to secure decent and affordable rental housing or make a downpayment on a modest home of their own. Now is the time to consider new approaches to address the Nation’s needs for both affordable rental housing and homeownership. Dedicating additional resources to expand the availability of affordable rental housing and reduce barriers to homeownership, would have a substantial impact in meeting the Nation’s housing needs.

Home | Menu | Links | Info | Chairman's Page