U.S. Senator Richard Shelby (R-Ala.), ranking Republican on the Committee on Banking, Housing and Urban Affairs, today made the following statement at a hearing on oversight of the Federal Housing Administration and the U.S. Department of Housing and Urban Development’s response to fiscal challenges.

“Thank you, Mr. Chairman

“Just days after the President’s re-election, the FHA released its 2012 Actuarial report, which revealed that the economic value of the FHA Fund has fallen to negative $16 billion.  That means the Fund’s capital reserve ratio now stands at negative 1.44%.  This news is obviously very disturbing and frustrating for those of us who have long been concerned about the health of the FHA. 

“For years, the problems of the FHA have been well known.  During the housing boom, the FHA unwisely guaranteed millions of risky mortgages with low down payments to borrowers with poor credit scores.  These mortgages have resulted in billions of losses to the FHA.

“The FHA has made matters worse by failing to come to grips with the magnitude of its problems.  Back in 2007, as the FHA’s poor financial position was becoming clear, I urged the FHA to devise a credible plan to improve its finances.  I stated that:

‘before the taxpayers are faced with greater losses, I believe we must determine how the FHA got into this position and how it intends to get out.’

“Unfortunately, for the past five years, the FHA’s leadership has understated their problems and sought to kick the can down the road.  This is now the fourth year in a row that the FHA Fund has been below its statutory minimum capital levels. 

“Yet, each year, we are told that this is a temporary dip and that within a few years everything will be fine.  In fact, in 2009, Secretary Donovan told this Committee that the drop in the capital ratio was expected to be ‘temporary’ and that it would ‘return above two percent within the next two or three years, even if FHA were to make no policy changes at all.’  We now know that this forecast was way off the mark.

“The Administration, however, continued to be optimistic.  In 2011, HUD still had its projection showing the FHA’s capital ratio reaching 2% in 2014.  Now, despite all of these reassurances, the actuarial report projects that the FHA Fund has a capital reserve ratio of negative 1.44%.

“And what is the response of the FHA’s  leadership?  Just this year, after further declines in the FHA Fund, both Secretary Donovan and Acting FHA Commissioner Carol Galante testified to two different Senate Committees that the Fund would ‘return to the congressionally mandated capital reserve ratio of 2 percent by 2015.’

“Needless to say, I am not nearly as optimistic about the future of the FHA.  Moreover, the inability of FHA’s leadership to clearly recognize and address its problems is raising doubts about their credibility and willingness to properly manage FHA’s finances.  It is time for FHA to face facts.

“First, the capital reserve ratio of the FHA Fund is dangerously low and has shrunk nearly every year since 2006.

“Second, the Fund’s capital ratios have been below FHA’s statutory obligations every year since 2008.

“Third, every year since then, future growth in the capital ratio has underperformed in relation to FHA’s predictions.  Hopefully, the shock produced by these latest projections will finally be a wake-up call for everyone.

“Hard choices lie ahead for this program.  FHA leadership must fully utilize its existing authority to shore up the value of this Fund.

“Additionally, Congress must consider reductions in permissible risk layering, further underwriting reforms, and a re-examination of premium structures.  It is time for serious reform of the FHA before it needs a taxpayer bailout, if it isn’t too late already.

“Thank you, Mr. Chairman.”