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MORTGAGE INSURERS URGE CONGRESS TO KEEP FHA REFORMS INTACT; NEW AUDIT CITES FHA'S IMPROVEMENT, CREDITS 1990 REFORMS

 WASHINGTON, July 27 /PRNewswire/ -- In testifying before Congress today, mortgage insurers cautioned against making any changes to the Federal Housing Administration's (FHA) single-family mortgage insurance program which could increase the fund's risk and threaten its financial stability. Any changes that reduce the down payment requirements or increase the mortgage limits could damage the fund's improved financial standing, according to the Mortgage Insurance Companies of America (MICA).
 "FHA hasn't even met the minimum capital ratio established by Congress," said Charles M. Reid, president of MICA. "We need to allow FHA to build capital to ensure its existence for future generations of home buyers." Reid testified today before the House Subcommittee on Housing and Community Development.
 Testifying on behalf of the entire mortgage insurance industry, Reid discussed the health of FHA as determined by a just-released, Price Waterhouse actuarial study of FHA for fiscal 1992. Price Waterhouse revealed that FHA failed to meet the minimum capital requirements established by Congress to ensure the fund's viability.
 In 1990, Congress mandated FHA to achieve a capital ratio of at least 1.25 percent by 1992 and the current ratio is only .43 percent, according to the actuarial review. The fund is not expected to reach that capital ratio until after 1995.
 "The FHA fund is only one-third of the way towards its minimum requirement," said Reid. "Fortunately, Price Waterhouse expects FHA to meet the second watermark -- the 2 percent capital ratio by the year 2000 -- but only if the reforms Congress mandated in 1990 remain intact."
 In addition, Price Waterhouse found the 1992 book of business to have a positive cash balance -- the first business to be cash sufficient since 1979. Significantly, this was the first book of business that was fully subject to the 1990 Congressional reforms.
 "As long as FHA holds a steady course, it should be on the road to financial recovery," said Reid. "That's good news to all of us involved in housing finance and good news to the American taxpayer as well."
 The reforms were originally enacted after Price Waterhouse determined that FHA was losing roughly $1 million each day. The accounting firm warned that unless dramatic changes were made to the program, it could become insolvent by the end of the decade.
 In addition, the study reaffirmed the importance of borrower equity in determining the risk of default. The study reports that the "borrower's equity position is a major determinant of default behavior. The larger the equity position, the greater the incentive to avoid default on the loan."
 Some housing groups are arguing for loosening the down payment requirements for FHA, which would result in reduced borrower equity, and for raising the maximum loan limit to allow people buying more expensive homes to use the government program. According to MICA data, people with more expensive homes tend to default more often than those of more modest means, among mortgages with similar percentage down payments.
 Reid questioned the prudence of raising FHA's loan limits in both high- and low-cost areas when FHA is still experiencing significant financial problems. According to MICA, raising the limits will only exacerbate those problems by increasing the frequency and severity of FHA's losses, particularly since FHA covers 100 percent of the loan amount when default occurs.
 "Raising the loan limits does absolutely nothing to help bridge the affordability gap," said Reid.
 MICA is the trade association representing the private mortgage insurance industry. Its members help loan originators and investors make funds available to home buyers with as little as 5 percent down by protecting these institutions from a major portion of the risk of borrower default. Last year, the industry helped 907,000 families buy homes with small down payments.
 -0- 7/27/93
 /CONTACT: Patricia L. Kosciuszko of the Mortgage Insurance Companies of America, 202-371-2899/


CO: Mortgage Insurance Companies of America ST: District of Columbia IN: FIN SU: LEG

MH-DS -- DC004 -- 6085 07/27/93 09:08 EDT
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Date:Jul 27, 1993
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