LESHENSMRANG.TK. CHARON pied States Mouse of Representatives | MANE WATERS. cA, anon MEER ‘Committee on Financial Services 212 Rasburn Rouse ©Mfce Building ‘Basing, B.C. 093 January 8, 2015 “The Honorable Julian Castro S USS. Department of Housing and Urban Development 451 Seventh Street, S.W. ‘Washington, D.C, 20410 ear Seeretary Castro 1 appreciated your recent visit to my office to discuss your goals and priorities forthe Department of Housing and Urban Development (HUD). As we discussed at that meeting, I have significant concems regarding the financial condition ofthe Federal Housing ‘Administation (FHA) and look forward to working with you to ensure tha the agency is ‘operated in a fiscally responsible and prudent manner, mets its statutory objectives, and protects US. taxpayers As you are aware, federal law mandates that FHA's Mutual Mortgage Insurance Fund (MMF) maintain a capital reserve ratio of no less than 2 percent, which i a measure of its strength. To ensure FHA’s compliance the MMIF undergoes an actuarial review by an independent auditor each year. On November 14,2014, FHA reported to Congress the findings from its most recent actuarial review, which indicated a capital reserve ratio of O41 percent, well, ‘below the minimum statutory requirement. The actuarial review suggests thatthe MMIF will reach the required capital reserve level of 2 percent in 2016, But as you are well aware, each and {every one of FHA’s projections onthe capital reserve ratio over the past several years has significantly missed the matk. Moreover, since FY 2010, when the MMIF’s capital reserve ratio {ell below 2 percent forthe frst time, FHA has been non-compliant with the statutory requirement. FHA's inaby to maintain the required capital reserves culminated in October 2013, when it was forced to draw down $1.68 billion from the U.S. Treasury as a “mandatory "appropriation," whichis Weshington-speak for “bail-out.” 1am also concerned that the capital reserve ratio of 0.41 percent has been artificially inflated by two one-time events that are uaelated to FHA loan performance: (I) the diversion of settlement proceeds from Department of lustice enforcement actions against mortgage lenders; and (2) the $1.68 billion draw-down from the U.S. Treasury. Therefore, I request that FHA. calculate what the capital reserve ratio would be if those two items were backed out, and provide ‘the Committee with the results ofthat analysis, ‘As we discussed during your visit last month fee strongly thatthe government must be held to the same standards and expectations that upply to individual citizens. Therefore itis ‘important that FHA fulfill it legal obligation to maintain the statutorily prescribed capital reserve levels. I am encouraged that the MMIF has shown modest improvement in this regard‘The Honorable Julian Castro January 8, 2015, ‘over the past year. However, the MMIF is still considerably undereaptalized, and the capital reserve ratio FHA reports could be materially inflated because of legal settlements and funds received from the direct draw on the Treasury. Finally, Iam aware ofthe many pressures you face to achieve FHA fiscal soundness as Well as promote and encourage homeownership, particularly among first-time homebuyers and low-income families. However, these objectives need not be mutually exclusive. A fiscally sound FHA, with a clea éefined mission, ensures homeownership opportunities for creditworthy first-time hom:buyers and low-income families. That is why today's 1announcement by the Present that FHA will lower its mortgage insurance premiums is so isappointing, FHA’s independent actuarial review states that $85 billion in claims-paying cepacity \would be needed for FHA to survive an economic criss similar tothe Great Recession. The study estimates that it would take FHA atleast four years to reach this igure, provided there is a steady stream of premium income. Its critically important that FHA be able to pay its claims ‘without having to rely onthe U.S. Treasury and taxpayers. Lowering premiums only places FHA further behind in developing the appropriate capacity to respond to future crises, while at ‘the same time exposing taxpayers to greater risk of los. In light of today’s announcement, the Committee on Financial Services will be requesting your testimony in February. Before appearing before the Committe, however I request that you ‘provide the Financial Services Committee, in writing, with the recalculation of the capital reserve rato referenced above, as well as the written analysis and data HUD used to justify ‘recent changes in the FH single family poliey premium structure look forward to your response, Sin JNBHENSARLING ‘Chairman Tiles}