STATEMENT OF CONGRESSMAN CRAIG THOMAS 5/8/91 Thank you Mr. Chairman. I appreciate you holding this hearing so that we can discuss the issues surrounding the Federal Housing Administration's Mutual Mortgage Insurance Fund. More than half of the home purchases in Wyoming are made possible by the FHA program. On a whole, it appears it is working well. Secretary Kemp has been reminding the American people and the folks here in Congress the importance of home ownership and what it does for a family. I applaud the Secretary's efforts. In our future actions, we certainly should not make homeownership less available to families by making it further out of reach. But if the Mutual Mortgage Insurance Fund is losing money, some changes need to be made. Today, I want to learn how in fact the insurance fund is performing, is the fund losing money? I want to know more about the model used to study the insurance fund, does the model consider the numerous policy changes in the mid-80s? Essentially, I want to be assured the proposals made by the Department are necessary and will not place additional burdens on FHA qualifying buyers, which may prevent them from purchasing a home. Thank you for coming before us to answer our questions. I look forward to your testimony. Statement of ALFRED A. DELLIBOVI Deputy Secretary U.S. Department of Housing and Urban Development Before the Subcommittee on Housing and Community Development Committee on Banking, Finance and Urban Affairs May 8, 1991 Chairman Gonzalez and Members of the Subcommittee, thank you for this opportunity to address the financial status of the Federal Housing Administration's (FHA) Mutual Mortgage Insurance Fund (MMI), as well as the Department's efforts to implement the FHA Reform provisions contained in the National Affordable Housing Act of 1990. I am accompanied here today by Arthur J. Hill, the Assistant Secretary for Housing-Federal Housing Commissioner and John C. Weicher, HUD's Assistant Secretary for Policy Development and Research. 2 Less than a year ago, the Department appeared before this Subcommittee and its Senate counterpart to discuss the results of a comprehensive analysis of the MMI Fund conducted at Secretary Kemp's direction by the accounting firm of Price Waterhouse. That report presented the first true picture of the actuarial soundness of the MMI Fund. While the report showed the MMI Fund was solvent, it revealed that the Fund was not actuarially sound and faced a serious threat of insolvency in the future. Price Waterhouse observed that the Fund's net worth had been declining for a decade at an alarming rate, and that the FHA would soon have a negative net worth unless strong corrective actions were taken. In response to the Price Waterhouse study, the Administration recommended a program of FHA reform based on four fundamental principles: - - - achieving and maintaining adequate capital levels; requiring that insurance premiums be risk-related, with higher premiums for lower downpayments; requiring that FHA borrowers have a real equity interest in their homes; and continuing the focus of FHA on meeting the mortgage credit needs of low and moderate income borrowers. On behalf of Secretary Kemp, I want to thank you, Mr. Chairman, and the other members of this Committee who contributed to the 3 successful enactment of an FHA reform package that meets these four fundamental requirements for actuarial soundness. It wasn't easy, and preserving the fund required some very hard decisions. Mr. Chairman, since the FHA reforms were signed into law late last year, the Department has been in the process of drafting implementing regulations that are consistent with the intent of Congress and our understanding of the underlying agreements reached during the House-Senate conference last year. At your request, my testimony today will provide the Subcommittee a current performance report for the MMI Fund, and a status report on 1990 FHA reform implementation. The most recent data on the condition of the Fund indicates that the reforms enacted last year were both prudent and responsible, and that lesser actions would have failed to achieve actuarial soundness as prescribed by Price Waterhouse and embodied in the Administration proposal. As part of his effort to reform and improve the financial management of HUD, Secretary Kemp almost two years ago informed this Committee that the Department would publish annually, through an independent accounting firm, audited financial statements for FHA. Price Waterhouse has completed its audit of the 1989 financial results of the FHA. This audit reflected a net loss for FHA as a whole for the year of $3.9 billion, as compared to an overall $4.2 billion loss in FY 1988. Specifically, the MMI Fund sustained a $617 million dollar loss for 1989 compared to a $1.4 billion loss in FY 1988. Although these figures reflect a slower rate of losses, stabilization of FHA's financial position has by no means been achieved. As of September 30, 1989, FHA's overall liabilities were $18.9 billion, compared to assets of $12.3 billion, resulting in an overall deficiency of $6.6 billion. The equity of the MMI Fund is a positive $1.02 billion, down from $1.8 billion the previous year. The report of the accountants paints a pessimistic picture of the current state of the MMI fund: "The FHA's Mutual Mortgage Insurance (MMI) Fund's equity of Although it is apparent from the Price Waterhouse audit that the financial status of the Fund needs improvement, some observers have used FHA's Cash Reports as a basis for contending that the Fund is on sound footing. While the MMI Fund sustained an over $600 million loss in 1989, there was an excess in receipts over cash disbursements of $7 million in the same period. Mr. Chairman, cash reports present only a static and one dimensional picture of the Fund's activity; they do not provide the basis for long-term fiscal management. Looking only at the current cash position fails to account for significant real and contingent liabilities the Fund has incurred liabilities that - will not be paid out until some date in the future. Generally |