10 QUESTION FOR DEPUTY SECRETARY DELLIBOVI I note that the firm of Price Waterhouse was selected to perform both the FY 1989 FHA audit and prepared the HUD actuarial soundness report. WHAT WAS THE PROCESS USED TO SELECT THIS FIRM TO DO THE 1989 AUDIT OF FHA? DID YOU USE A COMPETITIVE BID PROCESS? QUESTION FOR DEPUTY SECRETARY DELLIBOVI 11 FHA permits seller contributions, up to six percent of the mortgage amount, to help buyers pay closing costs, discount points or interest buydowns. In areas of high closing costs, builders sometimes use the option of paying a portion of a buyer's closing costs as a way of helping home buyers. The Department inserted a provision in Mortgagee Letter 91-1 that reduces the effectiveness of this option to the point where it is virtually useless. Every dollar paid by a seller towards a buyer's closing costs is offset by a reduction of almost a like amount in the mortgage amount which, in turn, increases the cash a buyer needs to close. Although the Department does not intend to include this particular provision in the Mortgage Letter currently being prepared, it does intend to continue to deduct seller paid contributions to closing costs as part of the computation to determine the maximum allowable mortgage. The effect of continuing this policy is to preclude the possibility of using seller paid contributions to closing costs as a way to help buyers meet increased cash requirements. This is particularly unfortunate in States with high closing costs (over 2 percent) where buyers face significant increases in the amount of cash needed to buy a home. Does the Department have any evidence to suggest that loans with seller contributions to closing costs perform differently than loans where the buyer pays closing costs? Has the Department assessed the potential impact of the Mortgagee Letter in preparation, on the volume of FHA activity, particularly in states where closing costs are high? Does the Department have the Price Waterhouse model in house and can you run alternative scenarios? Mr. DelliBovi's responses to Chairman Gonzalez' Questions (11 total) QUESTION: CHAIRMAN GONZALEZ HUD used to publish claim and financial data on FHA loans on a regular basis. For the last several years, there has been effectively a data embargo. Why are we not receiving FHA data? Do you plan, once again, on publishing this claim data, and if so, when? ANSWER: Cash basis financial reports, particularly for agencies with insurance-type programs, do not clearly show an agency's true financial position. Past experience has shown that until FHA's accounting records were converted to an accrual basis of accounting, consistent with generally accepted accounting principles, neither Congress nor the administration was aware of the serious condition of the FHA Fund. FHA is in the process of converting its general ledger from cash to accrual accounting so that reports can be prepared routinely which show FHA's true and accurate financial status. The Department will provide those reports to Congress beginning with fiscal year 1992. -1 QUESTION: CHAIRMAN GONZALEZ Doesn't it make more sense to follow the Department's earlier policy and keep these good risk mortgages in the MMI program, than to impose an annual risk premium that could drive them away from the program and lower the overall quality of the fha portfolio? ANSWER: Imposing an annual risk premium of 50 basis points will not "drive away" good risk mortgages from the MMI program. The overall premise of changing the structure of FHA's mortgage insurance premium is to consider the level of risk as it relates to loan-to-value. On any conventional mortgage above 80 percent (and in some cases 75 percent), private mortgage insurance is charged upfront and on an annual renewal basis. Therefore, an FHA mortgagor considering refinancing would have to have a loan-to-value less than 75 percent if he/she wanted to refinance on a conventional basis without paying mortgage insurance. Moreover, not many FHA mortgagors would want to refinance conventionally because there is not a conventional "streamline" product readily available like FHA's. Those FHA mortgagors that do have loan-to-values under 75 percent would refinance conventionally anyway to avoid the upfront mortgage insurance premium that FHA charges on all loans, regardless of LTV. The Department is concerned with keeping good risk mortgages, but does not feel that an annual premium of 0.50 percent will substantially impact a borrower's choice on refinancing out of FHA. For example, on a $65,000 mortgage at 12 percent, the monthly principal and interest payment equals $688. If that loan was refinanced at 10 percent today, the new monthly principal, interest, and annual premium would equal $597 (that includes $27 for the 0.50 percent annual mortgage insurance premium). Under this scenario, the mortgagor's monthly payment decreases by $71, or $852 per year that is more than one monthly payment saved each year by taking advantage of FHA's streamline refinance program. - In addition, the Department has to consider the future health and solvency of the Mutual Mortgage Insurance Fund. Foregoing the 0.50 percent annual renewal on any new FHA loan will negatively impact the Fund, and affect HUD's effort to reach the congressionally mandated capital requirement of 1.25 percent by the end of 1992. QUESTION: CHAIRMAN GONZALEZ In your testimony (page 4), you discuss the shortcoming of using FHA's cash financial reports as the basis for evaluating FHA's financial strength. Specifically, you mention that you must take into account all accrued liabilities which I agree with. - My question concerns the basis for deriving the reserves to cover the liabilities. In the FY 1988 Audit, HUD, with Price Waterhouse, used Claims Paid to develop their loan loss reserve figures. In 1989 and 1990, both claims and delinquencies have dropped while at the same time business has increased. That being the case, what adjustments did you make to the balance sheet with respect to the loss reserves to come up with the $600 million loss figure? Please be specific. Also, when will we see the new financial statements? ANSWER: The calculation of the loan loss reserve is a complex exercise which is not strictly a function of claims paid. Criteria such as the economic outlook, interest rate trends, home price trends, programmatic trends, and industry data are modeled to project the likely future impact of defaults on the FHA Fund. To be specific, based on current data for 1989, 1990, and 1991 originations, there is a modest decline of 5 to 10 percent in our single family claims rate; however, FHA expects that the current recession will impact the Fund through realized increases in defaults which will occur in 6-9 months. The specific amounts to be reserved for future loss will be determined as part of the MMI Fund actuarial update currently being performed by Price Waterhouse. Although FHA claim rates have dropped, it is not sufficient to look merely at quantitative data. For example, the number of claims paid on the coinsurance program are few, but the dollar loss per claim is $3.2 million. Only recently is FHA beginning to see the full negative impact of this program of the '80's, which was prudently terminated by Secretary Kemp. The 1990 audited financial statements will be issued in mid-July. -3 |